Check Cashing Cleans Up Its Act: These Financial Convenience Stores Are Branching Out

Check cashing has come a long way toward respectability in the past couple of decades. Its reputation, however--at least in the eyes of the media and much of the general public--has lagged behind.

Financial Service Centers of America (FiSCA), the industry's national trade association, which represents 5,000 financial service centers, recognizes this problem, stating: "While financial service center businesses touch the lives of millions of Americans, misconceptions still exist about our industry, the services we provide, and the consumers we serve."

In the United States, FiSCA estimates, there are approximately 11,000 neighborhood financial services centers, which cash more than 180 million checks a year with a face value of more than $55 billion. The check cashing and related financial services market is estimated at $11 billion.

Payroll checks account for 80 to 90 percent of volume--more food for thought in dispelling the myth that customers are indigent--though like many Americans, they often live from paycheck to paycheck. In addition to check cashing, these stores also provide customers with a variety of services including money orders, ATM access, electronic bill payment, payday loans (more politely known as deferred deposit services), and electronic tax preparation and filing.

Why do so many Americans use these services to cash checks, pay bills, get money orders, and more? According to many observers, the key factors are convenience, flexible hours, and immediate delivery.

In fact, "convenience" is the key to seeing these check cashing and related financial service centers more as they are, instead of as predatory lenders preying on the ignorant poor. Just as shoppers are willing to pay higher prices in convenience stores to buy bread or toothpaste any time of day or night, customers at check cashing stores willingly pay the fees for the convenience of having a financial services store close to home and open 24 hours 7 days a week. There are other reasons as well.

Banks--often the first to rail against check cashing and alternate financial services stores in "their" neighborhood--have done plenty to fuel the growth of check cashing operations. High fees, minimum account balances, per-check charges, and increasingly rapacious fees for bounced checks and overdrafts at banks have made using the services of check cashing stores an easier--and sometimes even less expensive--decision than managing a bank account, despite the fees check cashers charge.

But don't these places charge outrageously high fees and rip off the people who use them? Well, yes, some do, or at least they did. Some undoubtedly still do. Typical fees today, with an increasing number of states placing limits on them, are between two and three percent to cash a check, according to FiSCA. The fee on payday loans (deferred deposit transactions) is typically 15 percent of the total amount borrowed. While this sounds high, compare that with a credit card cash advance, for example, which typically charges an up-front fee of 3 to 5 percent of the amount borrowed (with a typical maximum of $99), plus an interest rate that could top 20 percent.

At an American Bankers Association conference five years ago, the U.S. Comptroller of the Currency noted that "the principal reason people give for not having a bank account is that it costs too much for their needs." And when many banks ceased accepting payments for utility and other bills, check cashing and other financial services companies were more than glad to step in to help.

Banks also can be intimidating and appear unfriendly to people who don't speak English as their first language, or who simply prefer to do business with people who look like and speak like them. Many underbanked, unbanked, self-banked people are more comfortable in the less formal economy--especially after being treated poorly or refused loans at mainstream financial institutions (banks). Retail locations providing needed financial services often are preferred by the unbanked.

As long as ten years ago, Richard Harnack, then chairman of the Consumer Bankers Association and vice chair of Union Bank of California, observed, "this population is not really underserved, it is merely served differently."

Savvy banks and credit unions are working with these so-called fringe operators, often in concert with community and economic development organizations. Union Bank was one of the early banks to see the value in working with, not against, check cashing and financial services firms. Others include Corus Bank, Chase, and KeyBank, and the list increases each year.

As in any industry, there always is the uncertainty of an external event: a new technology, tainted food, or an unexpected acquisition or merger. In June, the check cashing industry was hit with the news that Wal-Mart plans to open 1,000 in-store MoneyCenters. With approximately 40 million U.S. consumers lacking a traditional bank account (many already Wal-Mart shoppers), the retailing giant smells a new revenue stream. Initial details include cashing government and printed payroll checks for $3--period--as well as a reloadable, prepaid Visa debit card without requiring proof of U.S. citizenship or a bank account.

Another well-known retailer, 7-Eleven, has installed its Vcom 24-hour check cashing machines in about 1,000 of its stores. Vcom also provides ATM services, Western Union money orders and transfers, and bill payment through easy-to-use terminals.

Banks and other traditional financial institutions, retailing behemoths like Wal-Mart, and established franchisors like 7-Eleven have caught on to what check cashing companies have known for decades. Increased interest in this sector is good news for consumers. How it will play out for the check cashing operators is less certain. Those who take advantage of the opportunities presented by the growing acceptance of alternative financial services and the markets they serve will do well in the years ahead.

Here's a quick snapshot of the industry's franchise leaders. Startup costs range from $60,000 to $285,000, generally expect to pay upwards of $150,000, more likely $200,000 or more.

ACE Cash Express -- In mid-2006, ACE had 1,573 stores in 38 states, consisting of 1,353 company-owned and 220 franchised stores, making it the largest owner, operator, and franchisor of check cashing stores in the U.S. Services include check cashing, short-term consumer loans, bill payment, and prepaid debit card services. The company claims to have served more than 38 million customers. Ace has been ranked #1 in its category in Entrepreneur's Franchise 500 from 2003 through 2007.

United Financial Services Group -- Founded in 1977 and franchising since 1992, this brand had more than 150 franchises and 3 company stores operating in 2006. United promotes its "clean, bright, safe retail centers designed to create a community-bank atmosphere,"
as well as its emphasis on customer relationships, and a strong training and startup program and support for franchisees. Beyond check cashing, its array of financial services includes pre-paid MasterCard debit cards, direct deposit, prepaid phone, notary, and income tax preparation with e-filing.

Mr. Payroll -- Mr. Payroll started in 1988 and began franchising in 1990. This multi-state network of check cashing kiosks, located in C-stores and gas stations, provides fast and convenient check cashing, money orders, bill paying, money transfers, and other services. In 1994, Mr. Payroll was bought by Cash America, a large operator of pawn shops, and became a wholly owned subsidiary. In 2005, Mr. Payroll had more than 130 locations.

In August 2003, Cash America acquired Cashland, a chain of consumer finance centers offering payday advances, check cashing, money transfer, and similar services. In September 2006, Cash America entered the Internet-based payday advance market with the acquisition of CashNetUSA, which provides loans to customers in 27 states.

Cash Plus -- Started in 1984 in Riverside, Calif., Cash Plus has been franchising since 1988. In 1996, Craig and Julie Wells acquired the brand and refranchised it in 1997. In 2006, this privately held brand had 80 franchises in the U.S. plus 2 company stores. Candidates can choose a single-unit or area development program. The brand offers check cashing, payday advance loans, money orders, wire transfers, and more.

Express Financial Center -- Based in Tacoma, Wash., this company offers franchises only in the Western and Midwestern states. Franchise options range from less expensive small market franchise or store kiosks to full-service storefronts; as well as conversions, a multi-store plan, and area development. The company says its business is evolving from one "marketed to lower income customers located in urban areas in a less than attractive setting" to "a suburban middle income attractive alternative financial center."

Unicash Financial Centres -- Based in Toronto, this Canadian brand started in 1990 and has been franchising since 1998. It currently has about 20 branches providing check cashing, money orders, currency exchange, and related services. An estimated 25 percent of the Canadian adult population has no formal banking relationship.