Check-Cashing Store

What It Means

Check-cashing organizations (CCOs), commonly known as check-cashing stores, are business outlets that cash checks for a fee. They cash a variety of checks, including payroll checks, personal checks, government checks (such as Social Security checks), income-tax refunds, insurance checks, money orders, and cashier’s checks (the latter two are different kinds of prepaid vouchers that can be purchased in order to make a payment to a third party; both are commonly used in lieu of personal checks). Many check-cashing stores also offer various secondary services, including payday loans (small, short-term loans that are intended to be repaid on the borrower’s next payday), money transfers, and bill paying (wherein a customer can pay his or her utility bill and other bills through the CCO). Some outlets also sell money orders, lottery tickets, bus passes, fax-transmission services, prepaid phone cards, and postage stamps.

In the United States the clientele at check-cashing stores are predominantly low-income and working-poor individuals, many of whom belong to minority ethnic groups. Most do not have accounts with traditional financial institutions such as banks. People who are either unwilling or unable to do business with banks are often described as “unbanked.” In 2006 the Federal Reserve Board (a committee that oversees the Federal Reserve, the central banking system of the United States) estimated that nearly 13 percent of U.S. families did not hold a checking account. Substantial research has been conducted to understand why this population tends to avoid traditional financial institutions. Although there is still debate on the subject, some reasons include: a basic distrust of banks, the perception that bank fees are too high, and the failure of banks to provide financial services that cater to the needs of low-income people.

The check-cashing industry has grown tremendously since the mid-1980s. In the United States in 2006 there were approximately 13,000 check-cashing locations, which cashed more than $80 billion worth of checks per year. CCOs may be small, independently owned businesses or large regional or national chains. The most prominent CCOs in the United States are ACE Cash Express, Cash America International, and EZCorp.

CCOs have also been the subject of intense public and government scrutiny: while some people claim that check-cashing stores provide much-needed financial services to a segment of the population that is not adequately served elsewhere, others contend that the industry unfairly exploits the country’s most financially vulnerable population by charging exorbitant fees.

When Did It Begin

Commercial check cashing emerged in the United States in the early 1930s as a niche business for processing payroll and public-assistance (government-aid) checks. In the aftermath of the sweeping bank failures of the late 1920s and early 1930s, many Americans were reluctant to deposit checks into banks, preferring instead to cash their checks at neighborhood bars and stores that charged a small fee for the service. With the establishment in 1934 of the FDIC (Federal Deposit Insurance Corporation, which guarantees individual bank deposits against bank failure), public confidence in banks was largely regained, and growth of the check-cashing industry remained modest for decades.

The industry received a major boost in 1980 with advent of bank deregulation. By lifting certain government restrictions on how banks, savings banks, and credit unions (member-owned financial institutions) could operate, deregulation led to increased competition between the various kinds of mainstream financial institutions. In the scramble for profit that ensued, many traditional banking facilities closed less-profitable branches in poor urban neighborhoods, introduced fees for check cashing and penalties for accounts that dipped below a certain balance, and stopped providing the types of services (such as small, short-term loans) that low-income households need.

Thus, deregulation created a void in which a large segment of the population did not have adequate access to basic banking services. This void was quickly filled by check-cashing stores and other “fringe-banking” services, such as payday loan centers and pawnshops (issuers of small, short-term loans in exchange for some piece of valuable property, which is held as security).

More Detailed Information

Probably the greatest appeal of a check-cashing store is the convenience it offers. Unlike banks, which generally observe regular business hours, most CCOs stay open late (some are open 24 hours), six or seven days a week. Also, many banks place a hold on a check (especially if it is written for a greater amount than the balance in the depositor’s checking account) so that the depositor cannot access the funds until the check has cleared (been determined to be valid), which often takes a number of days. By contrast, a check-cashing store offers the check holder instant cash. Millions of Americans experience cash-flow shortages (meaning that the money from one paycheck barely lasts until, or even runs out before, the next paycheck is received). For these people the benefit of getting instant cash seems to outweigh the fee associated with the convenience. Indeed, according to Financial Service Centers of America (FiSCA), an industry trade group that represents CCOs and payday lenders, 30 million people cash 180 million checks at CCOs in the United States every year.

Check-cashing stores calculate the fee for cashing a check as a percentage of the amount of the check. The maximum percentages vary from state to state according to state laws, but it is usually between 2 and 3 percent for a payroll or government check. For example, if you cash a $500 paycheck at a check-cashing store that charges 2.5 percent, the fee will be $12.50. Fees for cashing personal checks are much higher and can even exceed 15 percent, because there is a greater chance that the check will not clear. While these fees might seem trivial compared to the benefit of gaining instant access to your funds, they add up: FiSCA has estimated annual check-cashing revenues in the United States to be more than $1.6 billion. Further, studies have suggested that the average unbanked American spends approximately 10 percent of his or her annual income on check cashing and other “fringe-banking” services.

The most significant secondary service offered by CCOs is payday loans. Alongside check cashing, payday loans became a booming business in the 1990s. For people who hold checking accounts, payday loans are intended to cover unexpected expenses and general cash-flow shortages and to help avoid bounced checks and overdraft charges. (When someone’s bank account does not have enough funds to cover a check they have written, that check is said to “bounce” when the receiver tries to cash it.) A customer takes out a payday loan by writing the lender a postdated check (postdating means labeling it with a future date when it can be cashed) for a certain amount of money. The term of the loan is usually one to two weeks, according to when the borrower expects to receive his or her next paycheck. The fee for taking out the loan is usually between $15 and $30 for every $100 borrowed. Even though this fee amounts to a very high annual interest rate (anywhere between 300 and 900 percent), many people are willing to pay it in exchange for fast access to needed cash.

Recent Trends

The ability to offer a wide range of services became critical for CCOs in the mid-1990s, when the rapid growth of electronic banking (particularly direct deposit) presented a major challenge to the industry. Direct deposit is a system that enables employers and government agencies to send payments electronically to an employee or recipient’s bank account. The funds transfer immediately, so there is no need for the bank to impose a hold on the payment, and there is no associated fee. The rise of paperless transactions threatened to take a major bite out of CCOs’ main business, processing paper checks. It was in large part the advent of direct deposit that led many CCOs to expand their services to include sales of lottery tickets, bus passes, phone cards, and postage stamps. CCOs also responded by finding ways to participate in the direct-deposit process. For example, they partnered with banks to receive the deposits of a segment of customers (especially those without bank accounts) and charged those customers a flat monthly fee (usually under $10) to withdraw their funds.

These and other partnership arrangements led to an increasingly blurry distinction between CCOs and mainstream financial services in the first decade of the twenty-first century.