The decision by the Central Bank of Nigeria (CBN) two weeks ago to reintroduce fees for ATM transactions has largely attracted adverse commentary. In part, this is a question of timing. Coming early into the tenure of the new CBN governor, there are reasons to wonder whether the apex bank may have succumbed to “regulatory capture”. The new governor, remember, was until recently a bank managing director. Inevitably, questions are being asked if in this regard, the CBN has acted as an institution led by a former banker, rather than as an industry regulator.
Partly, too, the new directive touches a number of conceptual third rails. In 2012, when, in concert with the Bankers’ Committee, the CBN transferred the burden for payment of the N100 fee on “Remote-on-us” ATM transactions to issuing banks, this initiative was advertised as part of the drive towards strengthening domestic financial inclusion. By returning this charge, is the CBN thus arguing that its financial inclusion targets have been met? That this particular tool is too blunt an instrument for the realisation of this goal— in which case, we would be expecting the CBN, soon, to roll out a new scheme that more properly drives the sector’s stakeholders in the direction of financial inclusion? Or that preserving the industry’s bottom line is of a higher order than increasing the number of Nigerians with access to and use of formal financial services?
Without any doubt, the financial inclusion goals remain; and would be with us for a while yet. Nor is there any question but that an industry regulator should constantly look to bring down the cost to consumers of using the industry’s services. The simplest method for forcing down prices is to reduce obstacles to industry exit and entry — to strengthen competition in other words. In a closely regulated sector like banking, this challenge is of a different complexion however. Regulation to reduce prices might need to be more intrusive.
Within this context, financial stability concerns should focus on ensuring that banks can sustainably discharge their responsibilities to their publics at the lowest cost possible, rather than have the regulator support policies that effectively act as taxes on the banking public to the advantage of banks’ books of account. Still, it is well-nigh impossible to ignore the fact that banks’ costs are a major contributor to the exclusion of the vast number of our nationals from the formal financial sector. With only fixed deposits (N50,000 and above, in most cases) attracting yields above the headline inflation rate, all other bank deposits are a dis-saving. Conversely, the rates on loans at the retail end are prohibitive — but often not as much as the average loan shark’s (which again is micro-finance banking’s main value proposition).
So, essentially, currently, banks’ cost structures do not conduce to integrating lower income earners into the system. But there are also institutional reasons why most Nigerians would not open a bank account in a hurry. The details and documentation associated with account opening and use, for instance, may not be friendly to a barely literate populace, even when all they do is reflect worries over identity in a jurisdiction in which a national identity infrastructure is remarkable for its absence.
In favour of the charge, though, is the fact that it reflects the cost of providing a service. And even then, it was charged only for transactions by cardholders of one bank carried out on the ATMs of another bank. For such transactions, until the December 2012 decision, N100 was charged each ATM user who accessed his/her accounts from another bank. N35 of this sum was money earned by such customer’s bank; while the remainder, N65 was shared between the acquirer — the bank whose ATM dispensed the cash — and the switch (over whose network the transaction was conducted).
What the December 2012 arrangement did was to burden the issuing bank with this N100 charge. Of course, for such transactions, the banks lost N35 on all ATM withdrawals by their customers from other banks’ automated teller machines, while paying N65 to both the acquiring bank and the respective switch.
With customers free to use any ATM of their choice, several unintended consequences arose from this arrangement. Banks that had invested in both ATMs and card issuance were at an obvious disadvantage. They lost money each time their customers exercised the new freedom. This disadvantage clearly ignored (it was aware of the fact) that there was a cost to be borne for driving ATM usage as a key part of the financial inclusion process.
Besides the cost of each ATM, effective deployment has meant that banks have to source feed notes; have to beef up security at their ATM galleries, especially since most try to provide seamless service 24/7; have to invest in batteries of inverters to ensure the machines are constantly on; and invest in network connectivity. There is the argument that these alternative channels have helped banks decongest their banking halls, and speed up the expansion of their service footprints through the more rapid roll out of small form factor business locations.
None of which addressed the need for banks to expect a return on their investment. By removing the ATM charges, the CBN invited banks with extensive outlays in ATM deployment to cross-subsidise their operations. But even this route was denied such banks, as the CBN took shears to most banks’ charges in the period since December 2012.
If the removal of the ATM charges was distortionary in the degree to which it disproportionately punished investment in alternate delivery channels, what the CBN appears to have done with its new directive is to have bank customers cover this cost.
Mr. Uddin, an economic historian and finance expert, writes a monday column, and is a member of the editorial board of Premium Times.