May 4, 2019
A couple of weeks ago, Business Insider published an amazing article by Alex Morrell on check cashing that I think is well worth everyone’s time to read: An Ivy League professor who spent four months working in a South Bronx check-cashing store says we’re getting it all wrong.
The article focuses on the research of University of Pennsylvania professor Lisa Servon, who spent several months working as a cashier at a check-cashing service in order to actually understand why people would ever choose such a service instead of the normal banking industry. She actually found a lot of interesting reasons why, ones that she’s outlined in her book The Unbanking of America.
I know several people who use check-cashing services, and their primary reason for doing so is that local banks will no longer do business with them. Those individuals built up a large history of overdrafts and other such misuses of the bank’s services until they had piled up a mountain of unpaid overdraft fees and other expenses, at which point the bank simply cut ties with them. They now use check-cashing services, for better or worse, for their financial needs.
First of all, let’s look at what the check-cashing industry is and the services it provides, because it’s something that many people who are “doing things right” in their financial life may be unfamiliar with.
A check-cashing service offers a number of financial services, many of which you would expect to find at a typical bank. Check cashing is obviously one, but others include payday loans, other short term loans, bill payments, money orders, notary services, currency exchange, public transportation passes, mail services, prepaid debit and credit cards, and so on. The exact services vary from business to business and even location to location.
At a check-cashing service, the biggest thing you’ll notice is that the services are listed on a menu, not too different than what you’ll find at a fast food service, and each service is denoted with an exact price. Those prices are often in dollar amounts, but sometimes, as in the case of the check cashing, it’s listed as a percentage of the face value of the check.
What a check-cashing service typically doesn’t offer is a checking or savings account. They don’t and won’t hold your money for you. They won’t enable you to write checks on behalf of an account that may or may not have money in it.
Here’s how I look at the two in comparison. A check-cashing service offers all of the services of a bank that don’t require extending trust to the customer; instead, all of the transactions are done over the counter for a clear fee. What sets a bank apart is that some bank services are oriented around extending some trust to the customer, but the fees come in whenever a customer does things that are outside of a narrow list of things, and the fees are often unclear.
You can see this when you compare the experience of taking a check into each of those businesses.
At a check-cashing service, you take your check in there and you see that they charge you 3% to cash that check. It’s a $1,000 check, so you pay $30 to cash it – they hand you $970. The business will attempt to verify the check before they cash it, of course, and that can take a few minutes. Once they do cash it, though, the $970 is yours. You walk out of there with no further business arrangement between you and the business.
At a bank, you take your check in there and there are no fees listed clearly anywhere. You take that $1,000 check up to the counter to cash it. They’ll cash it for you – if you have an account there – and if you do have an account, they’ll encourage you to deposit that check and may even require it to be deposited.
That’s the end of the story, right? Why would anyone ever use a check-cashing service, then? Here’s a quote from the article:
“The prevailing wisdom from bankers and policy makers went like this: People who used alternative financial services — like check cashers and payday lenders — were making expensive and unwise decisions. If we could just educate the ‘unbanked’ and ‘underbanked’ and usher them into the modern financial system with a bank account, their fortunes would surely improve.
‘It felt like the only way I could answer this question: If alternative financial service providers are so bad — if they’re so predatory and so sleazy and so much in the business of taking advantage of people — why are people using them in growing numbers?’ Servon said.
But Servon, a professor of city and regional planning at the University of Pennsylvania and a former dean at the New School, spent 20 years studying low-income communities, and to her, that picture didn’t add up. Most of the unbanked (the roughly 7% of US households without checking or savings accounts) and the underbanked (the nearly 20% that had such accounts but still used alternative financial services) that she encountered were neither naive nor irresponsible about money.
‘The implication of that’ — the biennial surveys of the ‘unbanked and underbanked’ by the Federal Deposit Insurance Corporation – ‘was these people were making poor decisions,’ Servon recently told Business Insider. ‘I knew that the people I had worked with closely who don’t have very much money know where every penny goes. They budget things. They know where to get the best deals on things. And so it struck me that if they were using check cashers, there must be a good reason for that.’
It didn’t even seem clear to people studying the banking industry as to why people would ever use a check-cashing service. Surprisingly, it turned out that there were reasons:
Servon was surprised by what people told her. Over and over, Servon heard and observed that check cashers often met customers’ needs better than banks did.
She discovered there were three main reasons people used these services instead of banks: cost, transparency, and service.
Cost Check-cashing services tend to charge very clear fees for their services and those fees often seem really high compared to traditional banking services. Quite often, that’s where the comparison stops – check-cashing services appear to be a ripoff.
The thing is, banks will often drain your money, too. They just do it in a more subtle way, through other fees. Banks charge ATM fees and account maintenance fees and overdraft fees. Many of the non-check-cashing services that they offer also undercut banks, such as the cost of a money order or a prepaid debit card. You also don’t typically have to wait for the services there, while on the other hand you’ll sometimes have to wait several days for a check to deposit.
Transparency Check-cashing services are very up front about their fees – as I mentioned earlier, they’re often displayed on a giant board inside the shop so you can see what everything costs right off the bat, just like at a fast food restaurant.
With a bank, you often don’t see the fees. They’re included in small text in a brochure or in the fine print of a lengthy handout. That means that such fees often surprise customers, and those surprises aren’t usually happy ones. Seeing your account dinged with a $3 ATM fee and a $9.99 maintenance fee for not having a particular balance or just to have the account open can be frustrating, especially when you’re not expecting it.
Service Check-cashing services are very much service-oriented businesses. They make their money through good customer service and interaction with customers. Most banks really don’t do that; they have tellers, but the tellers are usually driven by throughput of customers, meaning that they don’t spend a lot of time or a lot of effort establishing positive rapport with customers.
For many people, strong customer service is a real value that they’re willing to pay real money for. A person at the counter who will explain something to you instead of rushing you through it means a lot to many people. A person at the counter who positively engages with you, learns your name and your story, and remembers you when you return means a lot to many people.
If you look at things from this perspective, it becomes clear why some people use check-cashing services instead of the normal banking system. Many of those customers have been burnt by hidden fees and waiting for checks to deposit and are alienated by cold customer service, and that adds up to a deep mistrust of banks. That mistrust is exactly what’s met by check-cashing services.
All of this brings up a few interesting personal finance questions for everyone.
First, is there a reason for a typical customer of a bank to ever consider a check-cashing service?
It’s my view that most of the people who use traditional banks as opposed to check-cashing services are better served by the things that traditional banks provide today rather than the things provided by check-cashing services today.
Most users of traditional banking services today – people with checking accounts and savings accounts, in other words – are mostly in it for security and convenience. They want a safe place to put their money, and they want to be able to conveniently use that money to pay their bills and for other expenses. Banks cover these needs very well, and for many banking customers, that’s all they want.
I put myself into this category of people who are better served by the relative offerings of the traditional banking industry. I don’t particularly have a need for the relative advantages of check-cashing services in my life. When I take a check to the bank, I generally don’t need the funds immediately; in fact, most checks are just deposited automatically into my account and I don’t have to think about it. When I want to spend that money, again, I don’t want to have to go to a bank location to do so. I just want to be able to pay a bill online or write a check or something akin to that.
I also don’t typically engage in behavior that racks up fees – I don’t overdraft my accounts, I rarely use ATMs at all (and when I do, I know one that I use nearby that’s definitely fee-free for me), and I use the free checking option at my bank. I honestly don’t see many fees at all.
To put it simply, I don’t need or want to have to go to a location and pay a fee to have a check cashed right now, and I don’t get much value out of customer service with a person behind the counter. Those things don’t provide significant value to me.
That’s not to say that these factors are true for everyone. Some people do have a need for immediate check-cashing services, such as a small contractor who needs to pay his workers immediately (as described in the article). Some people do have a need for good customer service at the teller window, such as a person for whom English is a second or third language and they’re having trouble understanding some documents (again, as described in the article). Some people do struggle with fees, such as a person who is really struggling to make ends meet and keeps getting whammied by overdraft charges.
All of these people, and many more, may get more value out of check-cashing services than the traditional banking system. For me, however, there’s more value and fewer fees in the offerings at a traditional bank.
Second, is there anything a mildly frustrated banking customer can do without abandoning the advantages of traditional banking entirely and going with check-cashing services?
I think the best “middle ground” solution tends to come from credit unions, which tend to have a greater focus on customer service at the counter than banks do and usually have fewer hidden fees, and in my experience you can often get fees waived at credit unions simply by asking, something that often doesn’t happen at mainstream banks. That’s because of the purpose of a credit union – it’s a nonprofit that’s intended to serve customers first and foremost.
The catch with credit unions is that they tend to lack a few features that are appealing from other banks. One big factor is that many credit unions have closed membership, meaning you have to live in a certain area or be employed by a certain employer to be a member. There’s also sometimes a membership fee for joining. Most credit unions are very local, which means that they only have branches in a certain small geographical area. Some are not FDIC insured, something which is a given when it comes to banks, and some credit unions tend to have less robust online banking tools.
Because of those features, credit unions can feel like a “middle ground” of sorts, offering some of the customer service that people want from check-cashing services but also offering many of the conveniences of mainstream banking.
Third, what can a regular customer of a check-cashing service do if they’re finding that their needs are changing and they wish to move into a more traditional banking operation?
As alluded to in the previous answer, my initial suggestion would be for that person to check out the offerings at a local credit union. Find a union that you’re eligible for membership in, check out the services they provide, and sign up. You may even want to look for recommendations within your local social circle, as they may know of a solid option in your area.
Credit unions tend to be more forgiving of poor credit and are more up front when it comes to their fees, but they do offer most of the advantages of traditional banking – checking accounts, savings accounts, and so forth. They tend to be a great reentry point (or entry point) into traditional banking services for people, especially those who want good customer service at the teller window when they’re first figuring things out.
Here’s the take home message: many people use check-cashing services not out of ignorance, but because it is the best option for money services available to them that handles their needs. They may be locked out of the traditional banking system for any number of reasons. They may have particular needs that aren’t met at local banks, such as a need for rapid check cashing or language assistance. They may simply want positive interaction with people when doing their banking business. They may just simply be fed up with hidden fees that seem to keep dinging them.
For many people, those factors are relatively unimportant compared to the advantages of banking. If you keep a balance in your account, mostly just use online banking, and rarely use an out-of-network ATM, there’s almost no reason for you to use check-cashing services. Your bank provides what you need. That description matches me pretty well.
It’s not true for everyone, however, and check-cashing services do fill a niche that matches what some people need.
The only real “danger” of a check-cashing service is that people who might find better financial results in traditional banking use check-cashing services instead because of family history, recommendations, or so forth. (There may be situations where the reverse is true, too.)
In the end, having more financial services available to everyone is better for the purposes of competition and for customers looking for the right services for them. Even if you conclude that one particular type of service isn’t right for you, the presence of that service may eventually drive other services to improve their offerings over time. Check-cashing services, for example, may eventually push some banks to reconsider how they assess fees and how open they are with those fees, and in that situation, everyone wins.
