Check cashing: still not a good deal

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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.