Money for Nothing (and Cheques for Free?)

“Money for nothing” is the title of a song made famous by Dire Straits when I was young (we are talking 80’s here). The song refers to the easy way a rockstar makes his money compared to other “regular” people, and some of its lyrics – “money for nothing and chicks for free” – are often misheard as “money for nothing and checks for free”, which I find quite funny. The confusion came to mind when I was confronted for the umpteenth time with the opinion that cash withdrawals should be free of charge, but the association with chicks and checks really stops here.

There seems to be a lot of people of the opinion that cash withdrawals should be for free. “Why do I have to pay to take my own money out?”, I hear. Or “Romania is the only country in the EU that charges for cash withdrawals from ATMs”. It’s not the first time I read this. I haven’t done any research, but this is rather simplistic. I don’t know if the persons who claim this actually have accounts in other EU countries, but I do. My bank in the Netherlands indeed doesn’t charge me for cash withdrawals at ATMs but that doesn’t stop them from charging me 6.20 EUR per month for account maintenance. This charge obviously includes the cost for cash withdrawals at ATMs. Is this for free?

I don’t see why a bank, or anybody else for that matter, should be expected to offer its services for free. What I do see is that, if the cost for a service provided is lower, this will result in a lower charge for the service. The real problem is that the costs in Romania are high. A few comments:

Cash Costs

Cash itself costs money. Banks pay for (part of their) cash (BNR charges 0.3% for withdrawals) and from the moment it accepts or buys cash, the bank starts to pay interest over the amount to the depositor or BNR. But the cash, whether it is in a vault, in ATM or in transit doesn’t generate any interest itself. The cost of this is easily calculated by using a reference rate, let’s say a modest 2%. Banks have on a system level about RON 4.7 billion cash, so the cost of this is already more than RON 90 million. The real costs are much higher. Cash needs to be processed, stored and transported. So, the cash itself has a significant cost. It may be good to point out that because of the higher interest rates for RON, this cost is higher in Romania than it is in the EURO zone.

IT Costs

We also have the cost of the IT systems in the back, including card management. In Romania there are about 210 million card transactions per year or which the vast majority are cash withdrawals. In the Netherlands there are 2.5 billion card payments per year and the number of card POS payments is 5.8 times higher than that of cash withdrawals. I would bet the cost per transaction is much lower in the Netherlands, where I nevertheless pay 6.20 EUR per month in account maintenance fee.

The idea is to make the cost per transaction as low as possible. First, this means having as many transactions as possible per system. The second is to use the most cost-efficient alternative. In Romania, like in other countries, the cheapest way for an individual to pay is to use the card on a POS terminal. It doesn’t cost the client a thing. Banks charge a fee for cash withdrawals because it costs them money. Banks in other European countries have a totally different proportion between cash and cashless POS payments transaction than we have in Romania. Charging for more expensive, less efficient payments like cash and not charging for more efficient payment methods makes perfect sense.

Have you ever have had the pleasure of killing some time at Otopeni, Henri Coanda Airport, waiting for someone in the arrivals hall? Next time you do, count the number of ATM machines you can find and note how many different banks they belong to. When travelling abroad, check the number of ATM machines you can find in, say, Amsterdam Schiphol, Vienna Schwechat, London Heathrow, Paris CdG or any other airport. Compare the results.

Last time I checked there were 9 ATMs from 9 different banks in Otopeni which is already less than a year ago. In the other, much bigger, airports, most of the time you have to look for an ATM if you need one. There are only a few and most of them from the same bank or provider. It is not difficult to understand which “solution” has a lower cost.

The story is certainly more complicated than I present it here. Over time we will be able to lower costs by changing the mentality about cash in Romania, by increasing the number of transactions and reducing the number of banks. One day Romanian banks might no longer charge for cash withdrawals at ATMs. Still the real cost of it, high or low, will be paid for by the users, be it directly or indirectly through account maintenance fees, lower interests rates on deposits or other fees. So, instead of arguing about who should pay for it (always someone else), we should try to understand what can be done to lower the cost.

I much prefer to offer my shareholders a reasonable return based on lower costs with lower fees than on higher costs with higher fees.

By the way, I was last week in New York and withdrew money from an ATM three times. Each time the cost was USD 3, regardless of the amount.

*some figures in this post are approximations. The real figures will not be far off and will not change the argument.

(You can find the Romanian version here.)

Tagged as: ATMs, banks, money, withdrawals