News in Brief

Profit Drives Behaviour

Banks have shareholders who want a dividend and growth. Professor Brian Melzer of Tuck Business School in the US has written a paper with Jennifer Dlugosz of the Federal Reserve Board of Governors and Donald Morgan of the Federal Reserve Bank of New York about the income earned from overdraft fees on bank accounts, $12 billion in 2019 in the US. In 2021 two bills were proposed to limit those fees with the intention of helping low income people afford bank accounts. The paper examines the law of unintended consequences and considers whether restricting overdraft fees might make banks less likely to provide bank account to low income households.

A specific set of circumstances in the US provided real life data of what happens with and without overdraft cost restrictions. In real life, when banks were able to charge higher overdraft fees, financial inclusion increased. Fees went up 10% but provision of overdraft credit rose by 16%. At the same time they lowered their minimum balance requirement, a requirement which ranks first in reasons the unbanked are without accounts, by 25%. The share of low income households with bank accounts rose 10%. These new accounts persisted for at least two years.

Melzer’s conclusion was that this ‘revealed a preference for low-income people to have an account and continue to use it, and to assess the costs and benefits of overdraft fees for themselves’.

This has lessons for cash, as well as for general financial inclusion policy making. If cash is a cost centre and does not attract customers, then banks will reduce cash costs or even stop cash services.

Cash in India

The Reserve Bank of India (RBI) has issued a report on India’s payment system. Part of that report benchmarks India against 21 countries.

Cash in Circulation (CIC) as a proportion of GDP rose to 14.4% in 2020/21, up from 10.7% in 2017/18. Hong Kong and Japan have higher ratios, 21.3% and 22.9% respectively. Only China and Turkey saw a decline in their CIC figure over the same period. The RBI says the fall in India’s GDP explains to some extent this increase.

Cash withdrawals from the banking system tighten liquidity in the banking system, in line with the RBI’s current policy.

The RBI has issued guidelines directing banks to test their banknote sorting machines on a quarterly basis. Test decks of not less than 2,000 notes need to be run through machines which must reject soiled, mutilated and fake notes in line with the RBI’s guidelines. Different denominations must be tested including old and current series of the R100 and a range of denominations. Machines must be recalibrated if discrepancies occur.

Cash in Morocco

A World Bank survey has found that only 44% of all adults in Morocco have a bank account. Within this average there are some big differences. 34% of low income people have bank accounts, women 33% and older adults have significantly more than those aged 15 to 25. The global age gap average in bank account ownership is 15%.

The World Bank gives low incomes, high fees, distance to branches and religious reasons as the main factors behind low levels of financial inclusion. 19% of Morocco’s unbanked population give religious barriers as their main reason. Only 5% of Moroccans use their bank accounts to pay their bills.

Euro Changeover Looms in Croatia

Croatia adopts the euro at the end of the year and work is starting to prepare for the transition.

The country has about 4,700 ATMs which have to be adapted to take euro banknotes. Euro notes are a different size from the kuna, meaning that most ATM cassettes need adaptation or replacement.

There is also the challenge of being able to provide kuna banknotes up to the point of changeover, including during the busy Christmas and New Year shopping and holiday season. The decision when to make the change, before or after 1 January, will be made by the ATM owners and will depend on the regional coverage and the frequency of use of the ATMs. Some ATMs are able to issue kuna or euros with just a software change but most will require an engineer to visit them.

It will be possible to pay with either kuna or euros for the first two weeks of 2023, although all change will be given in Euros.

ATM Fees Rise in Pakistan

Pakistan, with a population of over 200 million people, has 17,000 ATMs operated by 35 commercial and microfinance banks. 80% are on bank premises. Banks charge fees if cash is withdrawn at their ATMs by people who don’t hold accounts at the bank. Although the major banks have held those fees at Rs 18.50-18.75 ($0.09), some have started to increase fees to Rs 23.44 ($0.11) per withdrawal.

Fees appear to be rising in response both to higher electricity and transport costs and because the government has imposed a super tax on commercial banks of 10% to generate more revenue.

Resilience and Sustainability by Koenig & Bauer

With the threat of Russia reducing, or even ending, gas supplies to Europe, Koenig & Bauer, of which Koenig & Bauer Banknote Solutions is a part, has taken steps to ensure that it does not rely on pipeline gas. By the end of July it will be using LPG, fuel oil and district heating instead of process gas at its major production sites. By 1 September the fuel supply for heating energy will have been modified. The risk of power grid fluctuations has led to Koenig & Bauer procuring high capacity mobile emergency power units to be used as required.

The long term goal is to be independent from fossil fuels and to generate as much energy for itself as it can. This helps Koenig & Bauer achieve its sustainability targets and builds resilience against energy market disruptions.

Argentinian Banks Ask for Digital Money

Inflation has reduced the purchasing power of a number of denominations in Argentina. The latest evidence of this is a request by commercial banks to the Central Bank of the Argentine Republic (BCRA) to be allowed to destroy huge quantities of unfit banknotes held in their vaults. Most of these are $100 banknotes.

The BCRA does not have capacity to destroy the notes. It is reported still to be holding 198 million 5-peso banknotes for destruction even though the 5-peso is no longer in circulation. The $100 is not suitable to be used in ATMs because the ATMs would need to be constantly refilled.

The Association of Argentine Banks (Adeba) wants the BCRA to reduce cash usage and move to digital money. It has submitted a paper, the Digital Money Initiative in Argentina (IDDA), to the BCRA for consideration.