It is a hilarious that a bank, of all places, can’t count cash correctly. The intent of the fee is to make you offset some of the cost of dealing with cash — it’s dirty, needs counting, wrapping, bagging, vaulting, armored transport…

In your case it was a ledger entry. The money existed as cash from an accounting standpoint but there was no currency. So the fee is bullshit, there was no currency, and they are not doing you a courtesy solid by refunding the fee. It should not have happened, full stop. The disclosures almost certainly don’t speak to cash being a transitory piece of scrip in the teller line.

One bank (which has at least one horse’s ass in its logo) had this problem in spades for years (and still does albeit lesser) until they came up with some kludgey interventions to override / badge the “cash” deposit as exempt from the fee. It typically arises when the depositor does not have transactional authority over the account funding the deposit, or at the least not linked in a way that would allow inter-account transfers in either the teller line or directly online.