IS CASH STILL KING?
The Canadian Bank Note Co. is an international success story, but the Ottawa company faces new challenges with smartphone software and the promise of a ‘cashless society.’
The call came through on Ronald Arends’ private line around 3:10 a.m. on June 25, a Saturday.
“We’ve got a fire, and there’s lots of smoke,” said his press operator at Canadian Bank Note Company.
Despite the hour, Arends, the firm’s chief executive, was now fully awake. “Adrenalin will do that," he says. The blaze had broken out in his company’s printing facility in Ottawa’s Westboro neighbourhood. Fire trucks were already on the scene, alerted by the company’s alarm system.
En route to the factory, a halfhour drive away, Arends mentally catalogued the potential damage. About 40 employees worked the overnight shift at the plant. That worried him. Then there were the corporate things: This was the main manufacturing plant for a $300-million-a-year operation. The basement housed exquisite, multimillion-dollar presses that produced currency for half a dozen countries, including Canada. The plant also contained gear for manufacturing drivers’ licences, passports and other kinds of secure ID.
Meanwhile, in a nearby staging area and adjoining halls that night, awaiting delivery, were rows and rows of stacked sheets of currency — a small fortune in inventory.
Ottawa’s Arends family has been printing Canadian currency for 40 years. Their Canadian Bank Note Company has, since 2013, been the sole producer of this country’s new polymer bills. The firm is also competitive internationally. Two years ago, it defeated a dozen global suppliers for the right to design and print New Zealand’s new ultra-secure currency.
Nearly as impressive, the International Banknote Society a few months ago declared New Zealand’s $5 bill the banknote of the year for its “stunning” design and security features. The win was a reminder that Canadian Bank Note is more than just an old-world printer. It is high-tech at its core.
Because it is, the Arends know better than most the stakes involved as the world’s technology giants seek to replace paper and polymer money with smartphone applications such as Apple Pay and Samsung Pay — software that allows owners of credit and debit cards to pay for items with a single click of their phone.
While there will likely always be a role for cash, the next few years will be critical in determining how big it will be — and whether it will be enough to support Canadian Bank Note’s best-known division and the source of nearly one-third of its revenues.
When Arends arrived at the plant, firefighters had already smothered the last of the flames. Arends was relieved to learn there had been no injuries. He was also encouraged the fire had been limited to a single printing press — a 10-year-old unit that produced passports and other types of identification.
Nevertheless, the plant would have to be shut down temporarily. Dense, ink-filled smoke had been sucked into the company’s ventilation system. A second printing press — brand new — would be unusable until it was cleaned and re-tested.
“You never know until you experience something like this whether your emergency plans will work out,” Arends would say shortly after the cleanup got underway. “In this case, they have.”
The precise cause of the fire is still under investigation, he said this week. Arends added he is confident insurance will cover the vast majority of the $15-million to $20-million cost of the lost printing press, along with related expenses.
Independent contractors from Toronto were hired to scrub the facility. One of Canadian Bank Note’s printing machines in Calgary was pushed into extra duty. It helped make up for the loss of the Ottawa unit. Apparently with some success. “We will not miss a single production target,” Arends said.
The company has also ordered a replacement press from the German manufacturer, Koenig & Bauer AG. It will be delivered in the fall, when Arends is confident he’ll finally be able to put the impact of the fire behind him.
By Canadian Bank Note standards, it’s been an extraordinary period. Although its products are used daily by millions of Canadians, this is an intensely private, family-owned firm.
Douglas Arends — the chairman and Ronald’s older brother — owns 100 per cent of the shares. Douglas’s wife, Shirley, is vice-president. Two of Ronald’s sons are employees. His wife, Marilou Robinson, is a senior vice-president of manufacturing and the company’s currency unit.
The siblings’ father, Richard, came to Canada from the Netherlands at age 10 — a move triggered by a failed family business — and found work as a stock keeper at an electrical company in Toronto. Douglas and Ronald, along with two other brothers and two sisters, grew up in East York. There’s a streak of athleticism in the family genes. Richard was a good enough goalkeeper during the 1930s and 1940s to qualify as a member of the Canadian Soccer Hall of Fame, while son Ronald played defensive back with the Toronto Argonauts from 1966 to 1970.
“I retired in my 20s,” Ronald laughs.
Ronald earned an MBA from University of Toronto while Douglas, who is also a certified engineer, got his MBA from York University. Their career paths diverged widely at first. Ronald spent nearly two decades at Canada Wire and Cable — a parts manufacturer — then switched to Tremco Inc., where he served as a senior executive operating out of Ohio. Tremco was a subsidiary of tire manufacturer B.F. Goodrich.
It was Douglas who provided the link to Canadian Bank Note. He had been working in Toronto in 1976 as a mergers-and-acquisitions specialist when he learned that Ottawa-area businessman Charles Worthen had put his majority stake in Canadian Bank Note up for sale.
At the time, the firm generated sales of just $7 million annually by producing banknotes, travellers’ cheques and passports. But Douglas saw potential for expanding into lottery systems and international markets. So he and another partner bought control of the firm — Douglas would later acquire 100 per cent.
Arends got a huge break in 1992, shortly after the fall of the Soviet Union. Drawing on business contacts from the Ukrainian community, Canadian Bank Note secured a lucrative contract to supply newly independent Ukraine with 1 hryvnia banknotes. The printing deal was instrumental in more than doubling Canadian Bank Note’s revenues to $87.5 million compared to 1991. Profits soared to $13.2 million from just $1.3 million.
Douglas seized the moment by selling 5.5 million company shares to the public — about one-quarter of the firm’s equity — for nearly $62 million. Canadian Bank Note had acquired serious financial heft and was listed on the TSX stock exchange. Douglas persuaded Ronald to leave Tremco in 1994 and join Canadian Bank Note as president and chief operating officer. (Ronald would become CEO in 2004). The siblings plowed a significant chunk of the share sale proceeds into new manufacturing equipment for its lottery systems unit and banknote production.
Running a TSX-listed firm never really suited them. The need for secrecy in so many of their operations did not easily coexist with the reporting requirements of a public firm. In 2004, publicity-shy Douglas paid $23 million to reacquire the minority portion of the company he had sold to public shareholders in 1993 for nearly three times that sum. Canadian Bank Note was once more private.
Shortly before the fire broke out last June, there were signs Canadian Bank Note might well be willing to emerge from its shadow. Ronald had invited the Citizen into the firm’s historic facility to discuss the company’s plans and operations.
Adopting a higher profile could be a matter of tactics. Canadian Bank Note has become one of the city’s most significant high-tech employers, which means it has to compete for local talent. It can’t do that effectively if potential candidates aren’t familiar with the firm.
About 900 of its 1,500 workers are based in Ottawa — as are most of its 250 software programmers (about 45 of whom work out of the firm’s Romania office.) The firm’s resumés, as revealed by the networking website LinkedIn, show a wide array of talent — software security experts, database administrators, electronics engineers, manufacturing technicians, artists and experts in multiple printing technologies and materials.
In part, the skills reflect the proliferation of anti-counterfeiting techniques that have emerged in recent years, most notably with the introduction of polymer-based currency in 2011. The polymer series incorporates holographic images, raised ink and security features that allow the notes to be authenticated by special readers. The various layers in a polymer demand special knowledge of fluorescence, lens refraction and adhesives, and of how these interact with different materials.
Companies in the business of printing currency and other secure documents must invest significant amounts to keep their technology fresh. This is true as well of Canadian Bank Note’s lottery systems unit, which accounts for nearly one-third of the company’s revenues — roughly the same as the banknote and secure ID divisions. Indeed, the company has put significant resources toward developing biometrics and facial recognition software for chip-enabled passports.
Given the need for both capital and security, it’s little wonder most countries rely on governmentowned firms to supply banknotes. Canadian Bank Note is one of a handful of private corporations that compete for this business — these include venerable, traditionsteeped firms such as Britain’s De La Rue (founded in 1821) and Germany’s Giesecke & Devrient (launched in 1852). Canadian Bank Note is a relative newcomer — it was established in 1897 to print banknotes and stamps.
For decades, these companies have thrived on a diet of long-term contracts from government agencies and central banks. Even so, this has not been an easy industry of late. De La Rue recently trimmed 14 per cent of its workforce in order to drive down printing costs. Giesecke & Devrient last year generated roughly the same revenues from its banknote division as it did in 2008.
The culprit, according to the German firm: “government-owned competition is increasingly crowding into the banknote printing market.”
Certainly that’s part of it. But Canadian Bank Note and its peers have learned from hard experience just how difficult it is to profitably stay ahead of the technology curve.
In the late 1980s, the Arends relied heavily on printing corporate stocks, bonds and other securities documents, but these have progressively shifted to electronic format. Canadian Bank Note still prints stamps for Canada Post, but these, too, represent a declining share of the business. Canadian Tire coupons are shifting to company loyalty cards.
Canadian Bank Note’s currency printing unit has been forced to absorb different kinds of shocks. In 1987, the federal government introduced the dollar coin known as the loonie. Printing the dollar had been a sweet deal for the Arends because the bill was used heavily by Canadians and lasted little more than a year before it needed to be replaced.
Losing that contract hurt — Canadian Bank Note printed the last $1 bill in April 1989. The loonie coin lasts decades and is manufactured by the Royal Canadian Mint, a federal Crown corporation.
In 1995, the Arends lost another chunk of business when then Liberal finance minister Paul Martin revealed the government would eliminate the $2 bill in favour of the toonie, which would also be produced by the mint.
The financial stress produced by the loss of the $2 bill contract, along with some teething pains in the fast-growing lottery systems unit, led to losses in the late 1990s and a month-long strike by union plant employees.
The shift to polymer banknotes has been another shock, though with fewer short-term ramifications. Polymer notes, like coins, last many years longer than paper currency, which means there are fewer orders for replacement bills down the road. But at least the orders to produce new bills stayed with Canadian Bank Note — and the initial contracts were lucrative.
Even better for Canadian Bank Note its only domestic rival — BA International (acquired in 1999 by G&A) — left the Canadian market in 2012.
This development allowed the Arends’ firm the following year to secure a $396-million contract from the Bank of Canada to print the entire polymer series through to 2022.
The deal was amended last year to include an extra $63-million order.
In fact, the company is in a bit of a sweet spot at the moment, with each of its three main units expected this year to post revenue growth. Not only that, but demographics are in its favour. The population and economy are still growing, bumping up the requirement for banknotes, and more people are applying for passports.
Across Canada and internationally, the use of banknotes is still on the rise — perhaps two per cent to three per cent annually, according to De La Rue. And the portion based on more secure polymer technology is expected to grow 10 per cent per year. This could benefit Canadian Bank Note down the road, though for how long is difficult to say.
The history of cash suggests the medium of exchange is resilient. Its use continued rising through the introduction of universal credit cards in the 1950s, debit cards in the 1960s, Internet banking in the 1990s and new forms of electronic payment software during the past decade. The popularity of cash owes much to the anonymity it offers buyers and sellers alike, the fact that you can touch it, plus its relative security and speed.
The big question is whether the combination of smartphones and a new generation of payment software will be the catalyst that finally pushes the cash economy aside.
On a brilliant day late in May, the top two officials of the Reserve Bank of New Zealand have dropped by the Ottawa headquarters of Canadian Bank Note. Governor Graeme Wheeler and deputy governor Geoff Bascand are paying a visit to the Arends, in part to show appreciation for the job they’ve done processing New Zealand’s new generation currency.
The initial order is for the production of 320 million banknotes over the next five years — covering all denominations. The awardwinning NZ$5 bill was introduced into circulation last year, along with the $10. This year, Canadian Bank Note is shipping the $20, $50 and $100 notes. The Reserve Bank reckons the contract will cost it about NZ$80 million (about $74 million Cdn.) — with about half being paid out to the Ottawa supplier.
When Bascand introduced the new currency last autumn, he was asked if this would be the last banknote design for a currency that’s expected to last another decade or so.
“It’s possible,” he said. “People are speculating about becoming a cashless society, but we haven’t seen it yet.”
Nine months later, at the Arends’ company headquarters, Bascand still allowed for the possibility that the banknote industry is entering an era of irreversible decline. “How long until we see a reduction, we don’t know,” he said, “Sweden’s one country where it is starting to reduce and that may be because it has such a high percentage of people using electronic products.”
For the moment, central bankers from countries such as New Zealand are buying the best anticounterfeit currency they can find.
If smartphone software does begin to erode the use of hard currency, Canadian Bank Note’s long-term contracts with Canada, New Zealand and other countries should create some breathing room to diversify into other fields. The fact that the business unit that produces banknotes makes up slightly less than 30 per cent of company revenues helps to reduce the potential shock if transition away from cash proves faster than expected.
The Arends brothers over the years have shown a knack for seizing opportunities that present themselves. However, Douglas and Ronald are now in their 70s. Should Douglas retire, it’s not clear what the succession entails.
“There would be no intention to sell the business,” Ronald says, “There would be a plan where management would continue. The specifics are Doug’s,” he adds.
Ronald’s sons, both employees, might be considered natural heirs. However, Ronald has no ownership in the company whatsoever. As for his sons? “What happens in their career depends on how they perform,” Ronald says. “They are the same as everyone else.”
By the time Douglas and Ronald leave the firm, the business of making banknotes may well have a completely different look. Nevertheless, even if hard currency disappears, the Arends believe their Canadian Bank Note operation will thrive.
“There’s always this question of ‘what do we do?’ if currency goes alldigital,” Ronald notes, “Well, we’ve invested in things like biometrics, which are already part of our products.” Canadian and other countries’ passports contain chips with digital images of travellers’ photos and other information. The technology includes facial recognition software for which Canadian Bank Note charges a fee, depending on the contract.
Ronald hints at how he and his brother are positioning their company in various federal government departments.
“We are critical to the security of Canada’s infrastructure,” he says, “Nobody does what we do in Canada.”
To reinforce that point, it may be necessary one day to change the firm’s name. That time is not yet — but may well be soon.