Inside the World of Check-Cashing Outlets

Not all financial services for the poor are equally bad—regulation makes a difference.

By Deborah M. Figart and Thomas Barr | January/February 2015

This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org

This article is from the January/February 2015 issue.

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“Three locations to serve you!” a newspaper ad for a check-cashing business boasts. These locations are open from 8 AM to 8 PM—or until midnight, or even 24 hours on some days. The stores are selling convenient, one-stop shopping for essential financial services for the less well-to-do. Ads like these say a lot about the growth of alternative financial services providers compared to mainstream banks. These businesses are growing, in part, due to the increase in income inequality and the reverberations from the financial meltdown and the Great Recession. Roughly 35 million people in the United States use the services of a check-cashing outlet each year.

In Atlantic City, N.J., a Black man in his thirties brings in his restaurant paycheck after trying to cash it at a nearby bank. The bank branch refused it when they realized that the paycheck was drawn from another bank. He does not have sufficient savings to sustain a bank account, and therefore pays to have his check cashed—2.21% of face value or $1.00, whichever is greater. The service representative at Atlantic City Check Cashing loads some of the paycheck’s value on a NexisCard, a prepaid Visa debit card sold by the store. Next in line is a middle-aged man who wires $780 to his relatives in Bangladesh for a $13 fee. He is followed by a white woman in her forties who cashes a public assistance check from the federal government in order to pay her rent; the fee is 1% of face value or 90 cents, whichever is greater. Next up is a young Black woman who cashes her paycheck from a nearby casino in order to purchase a money order to cover her monthly rent payment. Later, a Latino man in his mid-twenties cashes his entire paycheck and takes the cash with him. An elderly white man sitting in the lobby, one of the business’ best customers, comes in at least twice a week to receive cash wired from a relative.

These are observations from field notes during our visit to Atlantic City Check Cashing, a store in downtown Atlantic City that cashes checks worth several million dollars a year. You may recognize names of outlets in or near your town. Some of the larger companies are: ACE Cash Express, United Check Cashing, Check Cashing USA, Moneytree, California Check Cashing Services, or even Walmart’s MoneyCenter.

The trade association Financial Service Centers of America (FiSCA) estimates that non-bank financial transactions at outlets such as these account for $106 billion (over 350 million transactions) annually, and check-cashing services are responsible for over half of the industry’s activity. Mainstream banks have proven to be unaccommodating to low-income people. However, the strict regulatory guidelines for Financial Service Centers in New Jersey provide necessary consumer protections that assure a non-predatory environment for the unbanked and underbanked. A state such as Arizona, where a license is not even required to operate a check-cashing business, is another story.

Big Business and Only Getting Bigger

Check-cashing outlets are big business in the financial industry, with numbers on par with banks and credit unions. FiSCA counts about 13,000 outlets (FSCs) in the United States, 30% higher than economist John P. Caskey’s tally of 10,000 using the Yellow Pages in 2000. Note that the term “Financial Services Centers” is the phrase the industry prefers over check-cashing outlets (CCOs) or Alternative Financial Service Providers (AFSPs).

In one stop, a CCO patron can cash a paycheck, purchase a money order to pay rent or an auto loan, pay a utility bill, wire money to a relative in the United States or overseas, or purchase or reload a prepaid debit card. In the early spring, some CCOs will bring in a tax preparer to sit and work in the lobby to add that service, as well. In many U.S. states, CCOs can also offer payday loans and installment loans. The figure shows the estimated dollar volume of these services, with check cashing accounting for the lion’s share, followed by money orders and payday advances. The FDIC estimates the sum at $320 billion annually, when including refund-anticipation loans for income taxes, rent-to-own transactions, and “buy-here-pay-here” auto loans.

Cashing a paycheck at a CCO gives customers access to their money the same day. Banks limit access to $200 or so and can hold the money for up to five days. Further, low-income and low-balance customers get frustrated with a bank’s fees eating away at what little is in their accounts or sending their balances more into the red with low-balance and/or overdraft fees (see Deborah M. Figart, “Underbanked and Overcharged,” Dollars & Sense, July/August 2014). We spoke with an owner of several CCOs, who related from first-hand experience that FSC customers are living paycheck to paycheck, with little-to-no savings. This is confirmed by our field notes; the check-cashing business is booming.

To get detailed data on the business and the demographics of their customers, FiSCA hired a consulting firm (Cypress Research Group) to conduct an in-depth online survey. Taking into consideration the survey response rate and the fact that FiSCA’s membership consists of half of the industry, the consultants projected findings for the U.S. as a whole. Results were reported to the Advisory Committee on Economic Inclusion of the Federal Deposit Insurance Company (FDIC) in 2007. According to their estimates, CCO customers are low-income, with median income of $27,000. They are the working poor, with 85% employed either full-time or part-time. They are more likely to be never-married. And, according to our impressions from field notes and secondary studies, they are much more likely to be minority and/or less educated.

Even Walmart offers low-cost check cashing in select stores. Is the retail behemoth moving into and/or shaping another growing market? Or is Walmart looking to increase profit by having check cashing money spent shopping before the customer exits the store? Maybe it’s a little bit of both.

CCOs May Be Cheaper

In New Jersey, the share of CCO revenue from check cashing fees is actually shrinking. According to the Department of Banking and Insurance, New Jersey CCOs took in roughly $94 million in check cashing fees in 2013. With 214 licensees statewide (at 347 locations), this revenue amounts to about $439,000 per company. The traditional check business has been declining with the increase in electronic checks and payments. Ancillary fees for other services (see figure) have become an important share of revenue. The latest service to be offered at Atlantic City Check Cashing and other outlets is the purchase of unused gift cards for roughly half their face value. Acting as the middle man, the CCO then resells the gift card at a discount through raise.com or a similar online site. For customers—It’s easy. It’s fast. It’s convenient. Of course it often does mean that the giver paid much more for the card than the recipient ultimately gets.

Lisa J. Servon, a professor at the New School University in New York City, spent a summer working as a teller (customer service representative) at two check-cashing outlets, one in the South Bronx and one in Berkeley, Calif., to better understand the business. It’s just too simple to use words such as “sleazy,” “abusive,” and “predatory,” she says, in a New Yorker article reporting her findings (The High Cost, for the Poor, of Using a Bank). Cashing checks is different than payday lending, which is more like usury. After interacting with hundreds of customers and coworkers, Servon concluded that it turns out banks are often costlier for the poor than check cashers and other alternative services.

A Tale of the States

CCOs get a bad rap because it is assumed that fees are too high and that patrons would be better off keeping accounts at mainstream banks. The Consumer Federation of America (CFA) has provided information about fees schedules and consumer protection in financial services for over 20 years. In 2006, CFA published a study titled “Cashed Out: Consumers Pay Steep Premium to ‘Bank’ at Check Cashing Outlets,” noting fees have crept upward.

While it is true that the unbanked can pay a steep price for financial services, it is really regulation that makes the difference. Check cashing stores are regulated by individual states, not the federal government. States with strong regulations are protecting consumers. In states with less regulation, consumers are more vulnerable.

At one end of the regulation spectrum is a state such as New Jersey. The Garden State outlaws usurious payday lending outright. The New Jersey Department of Banking and Insurance requires a check-cashing store to be licensed annually. The department publishes permissible check-cashing fees set by statute that must be prominently displayed in each location: 1% or 90 cents (whichever is greater) for a public assistance check; 1.5% or 90 cents for a Social Security check; and 2.21% or $1 for checks drawn on a U.S. depository institution or other financial entity. New Jersey is among the states that caps fees, and its permitted fees are among the lowest in the nation (see table).

Other states with capped, low check-cashing fees for paychecks include: West Virginia (1% or $1, whichever is greater); Illinois (1.4% plus $1 on checks $100 or less and 2.25% on checks greater than $100); New York (1.95% or $1, whichever is greater); Connecticut (2% or $1, whichever is greater); Delaware (2% or $4, whichever is greater); South Carolina (2% or $3 for electronically printed checks only); Pennsylvania (3%); California (3% with identification or $3, whichever is greater); Maryland (4% or $5, whichever is greater); and Washington, D.C. (4% or $5, whichever is greater).

At the other end of the spectrum are states with no caps on check-cashing fees. Stores in these states may charge whatever they think the market will bear. They could vary the fee by the amount of the check, for example, or what the check is drawn on. They could vary it by customer. CCOs across the street or across town from one another may charge different fees altogether. Fees may not even need to be transparent or publicly posted.

Among the states with no fee caps for cashing personal and business checks are (listed alphabetically): Arizona, Kentucky, Massachusetts, Minnesota, Nevada, Ohio, Utah, Virginia, Washington, and Wisconsin. Seven of those states do not even cap fees for government checks, such as Social Security and public assistance: Kentucky, Massachusetts, Minnesota, Utah, Virginia, Washington, and Wisconsin. There is no apparent geographic, demographic, or economic reason for the the degree of regulation in different states, other than perhaps the idiosyncratic history of institutional banking and laws in the individual states or a particularly aggressive consumer regulator and/or legislator (or lack thereof). In Arizona, any business that cashes more than ten checks in any calendar year and which gets paid at least $500 for the services during any 30-day period—a low bar—is considered a CCO. And the state does not even require a license or registration to operate a CCO. So almost anyone can decide to start up a check cashing business, without a background check. Fees for transaction services pale in comparison to the cost of credit services. Pawn brokers—nearly all are state regulated—often have a set-up fee and then can charge loan rates of 5-25% per month. Interest rates for payday loans (for one- to two-week periods) are often 300-750% annual percentage rate (APR) or higher. Payday loans are available in 35 U.S. states, according to the Pew Charitable Trusts’ excellent three-part series, Payday Lending in America. Regulations are tighter in the Northeast, with payday lending either explicitly or effectively prohibited in 15 states, mostly concentrated in the Northeast; 31 states permit payday loans but cap interest rates for them.

Check-cashing stores in loosely regulated states provide a myriad of unregulated transaction and credit services in addition to cashing checks—auto title loans, payday loans, vehicle registration services, notary services, documents preparation, title transfers, etc. Abuses for check-cashing services are less severe and less costly than for payday lending. They don’t usually grab the headlines. Last year, though, owners of check-cashing companies in Florida pled guilty to $24 million in check-cashing fraud involving identity theft for low-income customers who had their tax returns completed onsite. And several years ago, Florida CCOs were found to have facilitated workers’ compensation fraud in the construction industry.

New Jersey serves as a model for regulations—low caps on fees and fee-transparency requirements—to protect consumers. And payday lending is prohibited in the state. In an unregulated state such as Arizona or Kentucky, there is little consumer protection. Of course, state regulation will not necessarily prevent all abuses. The effectiveness of consumer protection ultimately depends on the strength of enforcement.

DEBORAH M. FIGART is professor of education and economics at the Richard Stockton College of New Jersey. THOMAS BARR is a junior economics major at the College of New Jersey.

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