THE CASE (AGAINST?) POS TRANSACTIONS FEES

If you’re privileged to live on “The Island”, where the water floods your living room instead of surrounding you like other regular islands, you have to pay a premium that doubles the POS fees.

THE CASE (AGAINST?) POS TRANSACTIONS FEES

Lately, there’s been an uproar on Twitter (I refuse to call it X) about how cash is now only available through POS agents and never at ATMs. The outrage on this “development” seems to revolve around the transaction fees. The fee structure for POS transactions is sub-optimal, at least for customers.

Let’s take a look at the costs of using POS terminals in Nigeria:

It’s easy to remember: for every 0 - 5,000 naira you transact, you’re charged 100 naira. But if you’re privileged to live on “The Island”, where the water floods your living room instead of surrounding you like other regular islands, you have to pay a premium that doubles the price paid everywhere else.

Note that these transaction fees are not merely for withdrawals but also for transfers. “But I’m not withdrawing cash”, you protest. Well, according to POS agents, you first have to “withdraw” the cash from your account. Then, you pay them to send the cash they just gave you to the recipient’s account.

THE PROBLEM WITH FIXED FEES APPLIED TO A RANGE

There’s a huge problem with this kind of fee structure where a flat fee is applied to a range: the fixed cost can only be maximized by a customer if you always withdraw the upper limit. I’ll explain the math.

1. If you withdraw N1000 at N100 fee, it costs 0.1 naira to withdraw every one naira. That means you pay a transaction fee of 10%.

2. If you withdraw N5000 at the same N100 naira fee, it costs you 0.02 naira to withdraw every one naira. That means you pay a transaction fee of 2%.

NOTE: 0.02 is smaller than 0.1, if your math is not strong.

If withdrawing N5000 costs you a 2% fee, then you should actually pay N20 to withdraw N1000, not N100.

"Okay, it costs less to withdraw N5000 than N1000. Ehn, so where is the issue?" You might ask. There are at least 2 issues:

A. WITHDRAWING THE LOWER LIMITS AT EVERY 5K MARK IS PENALIZED

If you withdraw N1000, you pay a higher percentage of fees. Same with 6k, 11k, 16k, 21k and every other N5000+n where n is less than N5000. To get the lowest fee possible, you must always withdraw multiples of N5000 whether you need the excess or not.

When you withdraw N1000 and pay N100 in fees instead of N20, you have paid an N80 penalty to withdraw the amount you need at the moment i.e. N1000.

By the time you withdraw N1000 at 5 different places, for a total of N5000, you would have paid N500 fees instead of N100—a whooping 400-naira penalty.

B. THE PREVIOUS FEE WAS 65 NAIRA PER ATM TRANSACTION, BUT ONLY AFTER THE THIRD TIME, AND ATMS COULD DISPENSE 20,000 NAIRA

When you do the math under the ATM regime, N1000 withdrawn at N65 fee amounts to a fee of 0.065 naira for every naira you withdraw, and this is only AFTER THE THIRD TRANSACTION. This means an effective fee of 6.5%. If you withdraw N20000 at N65 fee, you pay a fee of 0.00325 naira for every naira withdrawn. This means an effective fee of 0.33%---literally nothing.

We’ve gone from paying N65 fee to withdraw N20,000 to paying N400 to withdraw N20000. That's about a 515% increase in fees for that amount.

With the POS fee, your best outcome is paying a 2% fee. You never pay less than 2% fees, even with the most prudent structuring. With the ATMs, you can pay as little as 0.33%.

Notice how the POS fee hits a resistance line at 2%?

With ATMs, the fee continues to fall, ultimately nearing 0%.

CASH HANDLING/CONVENIENCE FEES SHOULD NOT BE SO EXPENSIVE

The most common response to this discourse has been: "I'll rather pay POS fees than queue at an ATM". This is the Convenience Fee Argument. Others argue that people should use electronic transfers instead. This is the Cash Handling Fee Argument. I will address both together.

Fees for handling cash or for convenience are never this high, even for electronic transactions which are the most convenient.

Take a look at Mastercard/Visa/Amex fees.

Before you say “but that's abroad”, hold on. Take a look at what obtains in Nigeria. You don't pay such fees to have your money handled. Here are sections 10 and 11 of the CBN Guide to Charges (opens as PDF)

Even to further the Cashless Policy, the CBN charges 3% only when the transaction is at N500,000.

Finally, it has been years now and the POS fees have not been enough to move Nigeria into a cashless society. Maybe the argument that it will encourage cashless transactions needs to get much-needed rest.

We need a new arrangement.

PS: Thank you for reading. I would love to hear your arguments in support of POS fees. I am willing to publish it as the next episode on my newsletter, with full credit to you.

Post-script: Thank you Oluwafikunayomi Odusola, Ayibaemi, and Favour Opaleye for your help with editing and proof-reading.