Where cash is king

Where cash is king.
Author: Branch, Shelly. Source: Fortune v. 137 no11 (June 8 1998) p. 201-2 ISSN: 0015-8259 Number: BBPI98049223 Copyright: Fortune material herein Copyright Time Inc. All rights reserved.

Six decades ago, when the first check-cashing outlets sprang up in Depression-era Chicago, the business was simple, even benign. Employers had only recently begun to use checks to pay workers, who had to convert the checks to cash somehow. At the time, many people were terrified of the nation's crumbling banks; the modest storefront shops offered a convenient alternative.
As the broad financial landscape has shifted, so too has the little-known check cashers' trade. Processing some $60 billion worth of payroll and government checks each year, the industry's 6,000 stores today often charge hefty fees. Strategically located near pawnshops and other venues of the fringe economy, these "neighborhood financial centers" have managed to escape much mainstream notice--save a few barbs from Ralph Nader types. But lately that is changing too.
The number of these financial centers has tripled since 1986, and check cashers are finding admirers on Wall Street. They're being courted, and in some instances copied, by banks. In a matter of months, places with names like Cash Cow will begin issuing debit cards. The annual report from Dollar Financial Group, a leading check-cashing chain, sums up the segment's rise blithely: "Industry growth has been fueled by...a decline in the number of households with bank accounts, an increase in low-paying service-sector jobs, and an overall increase in the lower-income population.".
Check cashers are hardly apologetic about such fundamentals. As the industry faces a crossroads, though, it is becoming better about gussying them up.
With paperless transactions and new technologies threatening to take some of their customers away, check cashers are getting bolder. On the hunt for more ALICs (industry lingo for people who are "asset limited, income constrained"), they are heading for the suburbs. They are installing ATMs and bill-payment centers in their stores, which, frankly, are beginning to look more upscale. Most important, they are seeking partnerships with major financial players that can catapult them into the world of electronic and mainstream commerce. "It's the natural evolution of the industry," explains Stephen Wolf, a director of the National Check Cashers' Association. "To become more involved in the banking system rather than separate from it.".
Ironically, this is happening in the shadows of the megabank, a concept that seems to have the finance world fixated on Roth IRAs and other middle-class trappings. But as check cashers evolve, with their ALICs queuing behind velvet ropes and profit margins swelling, mainstream players are finding this largely unregulated niche hard to resist. Cozying up to the industry are companies such as GE Capital, Chase Manhattan, and Citibank. "We see check cashers as complementary," says Peter Grassl, vice president at Chase Manhattan, which has helped ease New York City check cashers into electronic banking. "Their distribution points are very attractive from our point of view.".
Many Americans, no doubt, have driven past check cashers time and again, never slowing the Jeep or Benz to take note of the peculiar commerce taking place. The main activity, as neon signs blare, is cashing "all kinds of checks!" for fees of 1% to 10%. The core customer is typically nonwhite with less than a college education and has a household income under $35,000. Of the industry's roughly 6,000 stores, one-third are operated by six companies, led by publicly traded Ace Cash Express (see box); many are classically mom-and-pop. Ranging from seedy to antiseptic, storefronts face high risks of theft and fraud. Just 18 states currently regulate check cashers; of those, 13 place caps on fees. Only a handful of states require any kind of license to open shop.
In some cities, notably Chicago and Dallas, the Yellow Pages listings for check cashers are nearly as thick as for banks--the result, in part, of bank flight from lower-income and minority neighborhoods. In the words of Dollar's annual report: "As banks continue this trend, (people in) these areas will have fewer, if any, convenient alternatives other than check cashers to perform basic financial transactions." A typical check cashers' lineup includes not only standards like money orders and wire transfers but also tax refunds and high-rate small loans. "Our marketplace has expanded," says Abby Hans, a 27-year industry veteran and chairman of the National Check Cashers' Association. "We have evolved into a one-stop financial center. In essence, we are the working man's bank!".
That notion disturbs people like Jean Ann Fox, director of consumer protection at the Consumer Federation of America. She fears a polarized system where "middle-class people will be served by one federally insured system, and moderate-income people will have to rely on costly fringe bankers." In a national survey last year, the CFA found that, on average, the annual cost of cashing a $320 weekly paycheck was $375--or roughly double what many banks would charge for the same service. Small consumer loans--more on those later--carried even stiffer rates.
Check cashers, inured to such criticisms by now, point to some of the high fees charged by banks (e.g., $25 for a bounced check). They add that most of their stores post fees clearly, on fast-food-style menu boards--the sort of disclosure you're not likely to see at Wells Fargo. "Explicit pricing and a convenient, pay-as-you-go system is a better concept for our customers," says Donald Neustadt, the CEO of Ace Cash Express. He argues that check cashers offer a much-needed service in the community and that their fees are justified because of the costs they must assume. Besides, says Neustadt, "banks don't want these people in their lobbies.".
People, presumably, like Patrick Fletcher. A Tampa construction worker, Fletcher, 50, hasn't had a checking account for years. He didn't miss it much, either, until he shot himself through the left arm with a nail gun last December. After the accident, Fletcher found that banks wouldn't touch his out-of-state disability checks. To get his money, he has paid as much as 3% of his income to check cashers. "I'd like to have a savings account," says Fletcher. "But living from paycheck to paycheck, it's just not that easy.".
Fletcher belongs to the country's growing ranks of "unbanked" or "marginally banked" citizens--some 13% of the population, or 34 million people, who for one reason or another live mainly on a cash basis. They are the industry's primary customers. Many hover outside the banking system because they perceive they have little other choice. Some lack the minimum funds to keep a checking account; others simply distrust banks. In any case, they rely on check cashers for instant access to their money.
This is an industry that promotes spending, not saving; one whose products encourage poor money habits among the fiscally frail. Some stores sell marked-up postage stamps and scratch-off lottery tickets. In others, the rage is prepaid "dial tone service"--a costly way to get a disconnected phone turned back on without having to settle up with the local phone company. ("Sign up. It's easy!" says one brochure, advertising a month's worth of local calls for $49, plus a $40 processing fee.).
With U.S household savings rates at a five-decade low, a growing subset of Americans have drained not only their bank accounts but any available credit lines too. For these often desperate ranks, the check-cashing industry prescribes its own sort of subprime remedy: small, short-term loans that carry triple-digit effective interest rates. These "payday loans" are so costly that some states have banned check cashers from making them altogether.
The loans, often called "advances" in an attempt to avoid usury laws, work like this: A customer writes a check for, say, $115 and gets $100 in return. The store holds the check for two weeks--until payday--when it deposits and collects the funds. The loans may be small, with maximums usually around $500, but the payback burden becomes staggering when borrowers take out multiple loans and renew them again and again (see box). Rates for these transactions commonly pencil out to 100% to 500%, but have been known to hit 2,000%. "Yes, the effective interest rates are astronomical," concedes Frederick "Shad" Rowe, a Dallas money manager who holds an 8% stake in Ace Cash Express. "But it's better than going to a loan shark. I'm sure it is.".
The folks at GE Capital apparently agree. According to documents filed with the SEC, GE is one of the blue-chip names behind Dollar Financial Group, a check-cashing concern that is among the most enthusiastic purveyors of payday loans. Based in Berwyn, Pa., Dollar began as a processor of welfare checks. "It was a small company and not a particularly pretty business," recalls Jay Allen, a Bank of America senior managing director whose group helped finance a leveraged buyout of DFG in 1994. "In fact, most buyout firms probably would've gone, 'Ee-ew!' But Jeff's thesis made a lot of sense.".
"Jeff" in this case is Dollar CEO Jeffrey Weiss, a former managing director at Bear Stearns. He convinced the New York investment house Weiss Peck & Greer (which bears no relationship to him) that check cashing was a high-growth industry ripe for consolidation. WPG quietly took positions in DFG in 1994 and again in 1996. DFG grew quickly, gobbling up hundreds of mom-and-pop check-cashing outlets and adding new stores. WPG owns 48% of the check-cashing concern. GE Capital owns another 17%. Operating under names like QwiCash, Almost-A-Banc, and Cash-N-Dash, the company's 422 stores in the U.S. and Canada have revenues in excess of $100 million.
At Dollar, the payday loan goes by the name "Cash 'Til Payday" and is available for up to $500. Dollar will agree to roll the loan over after two weeks, charging $17.50 per $100 for each 14-day period. A $100 loan, then, can quickly cost $52.50. Cash 'Til Payday is so promising that the company has set up several stores on the West Coast to handle the loans exclusively. Weiss even figured a way to offer the advances in states where check cashers are barred from making them: He has the loans written by partner Eagle National Bank. The stroke of brilliance here is that Eagle, as a federally chartered institution, isn't bound by individual states' small-lending laws. (Representatives from both Dollar and GE Capital declined to comment.).
As check cashers become more prevalent, the question for banks may well become, Beat them or join them? "We'd like to see banks become effective competitors to every check casher," says Bob Gnaisda, co-founder of the Greenlining Institute, a San Francisco public-interest group. He estimates that banks are missing a $5 billion opportunity on check-cashing services alone, and he is lobbying Bank of America to enter the field. John Caskey, an economics professor at Swarthmore College, thinks banks can go one better. "Another solution is for banks to think of a completely new product that meets the needs of this customer," he says, "and then deliver it more cheaply than a check casher could." In other words, in trying to snare the habitual check-cashing customer, there is a low road and a high road.
For a glimpse of the former, head to Manhattan's garment district. On West 30th Street, the bank built by the Rockefellers has opened its own check-cashing storefront. Now, it's not unusual for banks like Chase to charge noncustomers to cash checks. But Chase isn't too comfortable discussing these New York City locations, called Chase Checks to Cash Clubs, which exist solely to cash payroll checks. "We've been piloting the concept," allows Chase's Peter Grassl, who tells FORTUNE that the bank has one such location (actually, the city has four stand-alone Clubs and three more annexes). Chase says its service is free to customers whose employers do business with the bank. For others, the Club charges a $15 annual fee, plus 1% of any check cashed.
At the Club on West 30th, there's no big visual departure from a regular Chase branch: It's got the navy awning, even a few Georgia O'Keeffe posters on the wall. The disconnect is subtler. There are no ATMs here. Tellers monotonously dispense cash from automatic chutes. And there's not a shred of literature about Chase's regular accounts.
The narrow approach taken by Chase and other banks distresses Yolanda Brown, vice president of Union Bank of California. Brown oversees a special program that is a hybrid of check cashing and a regular bank account. Called Cash & Save, the program is as much about education--how to budget, how to balance a checkbook--as it is about cashing checks. "The idea is to introduce people to basic banking services by satisfying their check-cashing needs first," explains Brown, who claims that Cash & Save's low fees have driven down the rates at other check cashers in the area. Hardly a charity effort, or even a loss leader, the program so far has 25% margins. Evidence, in other words, that banks can serve disenfranchised types profitably--and with dignity--if they choose.
It's safe to assume, however, that not every bank will want to be bothered. Especially not when there are other ways to piggyback on the industry without having to get too involved with its clientele. Take, for instance, the recent alliance of Citibank and the National Check Cashers' Association.
Like many unusual pairings, this one comes as the result of a regulatory wrinkle, one called the Electronic Funds Transfer Act. The law says that all federal payments, including Social Security and veterans benefits, must be delivered electronically by January 1999. With few exceptions, the government will kick out no more paper checks. That's bad news for the millions of check recipients who currently lack a bank account.
So the government, specifically the Department of the Treasury, which implements the law, is in the awkward position of routing out private-sector solutions to solve a public-policy problem. Unwilling to lose 10% of their income to Treasury's paperless mandate, check cashers lobbied dozens of banks to let them handle "the customer we know best," as Abby Hans, chairman of the NCCA puts it. The result: Citibank has contracted with check cashers to establish them as distribution points for EFT accounts. "It's scary to us that the government is authorizing check cashers," says Margot Saunders, managing attorney with the National Consumer Law Center. "I'm afraid we'll see many more banks partnering with them, rather than creating their own low-cost (EFT) accounts." John Bryant, founder of the nonprofit investment bank Operation Hope in Los Angeles, is grimmer. "It looks like the cost of being poor just went up," he says.
In the works is a debit card, linked to a limited-service account, that carries the logos of both the NCCA and Citibank. The account guarantees that recipients' funds flow through federally insured accounts, but little else. It will be available at check-cashing outlets only and has no savings feature. Customers will be able to use the cards at many locations, but they won't get any free transactions, as other Citibank depositors currently enjoy. Fees, still undisclosed, will vary, and depend on each check casher's own "pricing targets." The prospect appears to have even Treasury a bit nervous. "We want to step carefully here," says Under Secretary John Hawke. "Our basic concerns are making sure people aren't taken advantage of.".
It's a good thought. But in this business, generally speaking, the high road is the one not taken.
ADDED MATERIAL.
THE PRICE OF DESPERATION The quoted "interest rate" on a payday advance loan might seem reasonable--20% of check's face value in this example. The effective rate, after two renewals (rollovers), is far greater.
$200 LOAN FOR SIX WEEKS.
Payday advance loan.
(TABLE)"Interest rate" (20% of face value) $40Setup charge (weeks 1 and 2) $15First rollover (weeks 3 and 4) $55Second rollover (weeks 5 and 6) $55.
(TABLE)TOTAL COST $165Effective APR 715%.
Credit card loan.
(TABLE)TOTAL COST $5APR 21%.
COLOR PHOTO: PHOTOGRAPH BY WYATT MCSPADDEN KING OF THE CASH HEAP: Donald Neustadt, CEO of Ace Cash Express, surrounded by his company's turnover on a recent day--$31,592,562.19.
COLOR PHOTO: KEVIN HORAN WORKING MAN'S BANK? Check-cashing places, like this one in Chicago, offer more services than ever.
COLOR PHOTO: GREG MILLER CUT TO THE CHASE: The venerable bank has dipped a toe in the check-cashing business. This Manhattan "club" looks like a bank branch, but it has no ATMs. (Man counting cash outside Chase Manhattan Checks-To-Cash Club).
COLOR PHOTO: WYATT MCSPADDEN ALL CASH, ALL THE TIME: Check cashers say their stores are more "convenient" than banks. Some, like this one in Dallas, stay open till 10 p.m.