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Check cashing: still not a good deal

By Claes Bell ·
Friday, November 18, 2011
Posted: 1 pm ET

It looks like alternative financial services for the unbanked are just too sweet a plumb for large national banks to ignore. Victoria Finkle of American Banker reports that they're getting in on prepaid debit and check cashing:

Banks have generally neglected low-income consumers, seeing little profit in trying to attract business from poor people who live paycheck to paycheck. But now, as banks explore all options to boost their bottom lines, some are more willing to consider selling the alternative financial products these customers use. Now banks including Wells Fargo & Co., KeyCorp and U.S. Bancorp are increasingly trying to appeal to customers that their industry has largely ignored.

"We have seen a number of banks working on building out those transaction services," including check cashing and money orders, says Kimberly Gartner, vice president of advisory services at the Center for Financial Services Innovation.

This points toward a mainstream embrace of alternative financial services that's deeply troubling.

There's been an awful lot of talk about bank fees lately thanks to the debit card fee fiasco a couple of weeks back. That's great! People should be talking about bank fees and being cognizant of exactly how much they're paying for banking services. It helps keep the banks honest and helps people get the best possible deal on financial services.

But a lot of stories about rising bank fees in the media are accompanied by anecdotes of people deciding mainstream financial institutions are just too darn mean and they're giving up on real checking accounts altogether.

That's disturbing because, in a lot of cases, buying financial services without a bona fide checking account means getting a really bad deal, even compared to the worst mainstream checking accounts.

I blogged about this issue vis-à-vis prepaid debit cards a few weeks ago. A debit card with a la carte pricing may seem appealing, but the reality is, even the cheapest prepaid debit cards will be more expensive than a decent checking account under normal usage.

Prepaid cards charge for all kinds of things checking account customers are used to getting for free: loading funds on to the card, point-of-sale purchases, talking to a customer service representative, cutting a check. Terms vary greatly between providers, and some prepaid debit cards are better than others, but in general, the $1 to $5 fees they charge for a wide variety of typical customer actions will add up to much more than the cost of a checking account.

Check cashing is typically even worse. Here's a breakdown of checking-cashing fees among some of the institutions covered in the American Banker article, along with fee breakdowns from a couple of large national check-cashing chains.

Regions: 1.5 percent and 3 percent of the check amount, with a minimum fee of $3.

KeyCorp: 1 percent of the check amount.

U.S. Bank: $10.

Walmart: $3 for checks of $1,000 or less, $6 for check amounts of $1,001-$5,000

Ace Cash Express: 3 percent of the check amount.

Check 'N Go: Up to 3 percent of the check amount.

On a typical 26-paycheck pay schedule, among those options you're looking at a minimum of $78 a year just for cashing paychecks, and that's before you even use any of that money. At a 3 percent check-cashing rate, a U.S. family earning the median household income of $50,221 is going to be paying $1,506.63. That's a lot of money!

I understand that these services are really valuable to those who have no other viable options either because they've run afoul of ChexSystems or have some other circumstance that disqualifies them for a checking account, and that most people using alternative financial services don't earn nearly that much. Still, if you have the option of choosing between a low-cost checking account at a bank or credit union, and paying 3 percent of your earnings to cash your paychecks, it seems to me the answer seems pretty obvious.

It's amazing that someone would carp endlessly about a $5 a month debit card fee, but see alternative financial services that cost literally 10 times as much as a viable alternative. And that's not even accounting for the fact that alternative financial services are nowhere near as well-regulated or transparent as the checking account operations at major banks.

Many of the check-cashing places I looked at for the price comparison above refused to put their fee schedule online, and one of them even refused to give me pricing details over the phone. Say what you want about the large national banks, but I've never had a customer service rep at a major bank tell me they can't divulge fee information over the phone.

So as much as the banking industry has a lot of people justifiably up in arms, alternative financial services are rarely a better option, and should be avoided by most people.

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December 21, 2011 at 3:35 pm

Easier solution, open a free account after having resolved any chex systems issues. Have your check direct deposited. Withdraw your check every week, or use a debit card and opt out of Reg E. No overdraft fees if you can't overdraw, no check cashing fees, and no fear of losing your money by chance of dropping your wallet.

Joseph Coleman
November 22, 2011 at 10:37 am

Claes Bell's analysis omits the two most critical points that render checkl cashing services faster, cheaper, better than banks for low income consumers: transparency and back end service charges. Low income consumers are more likely to bounce a check becvasue they are working on such thin margins. One bounced check and its associated fees can start a cascade of troubles. At a Financial Service Center there are no suprises, no hidden fees, absolutlely no constraints on liquidity. If you factor the true costs of exceptional fees I argue that even at 3% many low income consumers will pay less at an FSC than a bank.

Alternative Voice
November 22, 2011 at 10:32 am

Whether a news article, simple blog entry or even a speech to a small group, it's always better when the author knows the subject or has at least performed some minimal research. A better understanding of business, general economic concepts, capitalism and low-income / low-savings consumers might reasonably have resulted in a much different bog entry than this blather.

Some quick thoughts:
1. It is normal and expected that businesses focus attention on areas of real or potential meaningful profitability rather than upon areas of low profitability or loss. This is not sinister nor neglectful.
2. Capitalism and competition are good. Banks often couldn't compete effectively and profitably with non-bank financial institutions in the past. Technological changes are providing new ways for banks to manage risk and provide effective transaction based services to people that want and need them. Increased access to transactional services and increased competition ultimately provide for improved services, costs and quality. What is deeply troubling is not the free market's embrace of competition that will better serve the needs of everyone but instead the author's uneducated assertion that "this points toward a mainstream embrace of alternative financial services that's deeply troubling."
3. Transactional financial services often make much more sense for the so-called unbanked or underbanked. Consumer advocates and bankers often speak condescendingly of these people and simply believe they need to be better educated. Instead try living paycheck to paycheck a while with no or limited savings. Only idiots speak only of Price. Quality and Service also matter - even to the poor and lower middle class! A check casher will often be available to cash a paycheck 24/7/365. A check casher will transfer the risk of non-payment or collection efforts from the consumer; if my employer's paycheck bounces, it won't cost me NSF fees. A check casher will treat a customer as a unique person and human being worthy of respect without dependence upon whether a substantial deposit account or loan is present. A check casher won't delay availability of money I need today. Etc....
4. The author says that "buying financial services without a bona fide checking account means getting a really bad deal, even compared to the worst mainstream checking accounts." This is simply wrong; see #3 for some reasons. Also note that roughly half of check cashing customers have bank accounts. Risk transference is a big deal for people with limited income and limited savings. That banks are starting to recognize this and offer competing services to meet the consumer need is fantastic. A smaller insurance fee to cash the check then deposit funds not subject to recourse is much better for the poor than playing the small employer / NSF Fee negative lottery.

The author concludes that, "alternative financial services are rarely a better option, and should be avoided by most people." A deeper understanding of the competitive advantages of alternative financial services and actual life needs of the unbanked and underbanked would result in a different conclusion. Further, the growing embrace of alternative financial services and increase in competition to meet the real, legitimate needs of people is a good thing. We are blessed to live in a land where capitalism is allowed to enrich the lives of all.

Samuel Bogale
November 21, 2011 at 9:47 pm

It is a no wonder why the banks keep getting richer!

November 19, 2011 at 9:02 am

I think the same people complaining about $5 debit card fees aren't the same people that are on Chex Systems and doing the whole check cashing ordeal.

Anyone that's been on Chex is essentially there because of a fault of their own.

The fact that they are cashing checks only adds on to the poor decisions these people have made.

t money
November 19, 2011 at 1:32 am

To be completly fair, it's not that these people can't get free checking/savings accounts because they're poor. It's because they've abused the privilage of them by not managing their money properly and causing overdrafts and other irresponisble actions.