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The Instantly Gratifying Economics of Check-Cashing Businesses

Yes, they take a chunk of your paycheck, but for many, that’s still better than doing business with a regular bank

Those check-cashing places are everywhere, and for those lucky enough to have never needed their services, they have a pretty seedy and disreputable reputation — at worst, they’re regarded as downright predatory. But as already stated: They’re everywhere, so… can they really be that bad? What exactly goes on in there? Do they provide a real service? What does it take to open one? Let’s — ahem — check. 

What are these places really good for?

Check-cashing places offer a lot of different services — bill-payment services, money orders, sometimes payday lending — but their primary purpose is cashing checks for people. These are usually business and payroll checks (many check-cashing businesses don’t cash old checks, out-of-state checks and personal checks, for obvious reasons).

Why would someone go there instead of taking it to the bank?

Well, what you’re talking about there is people who don’t have a bank account, or at least, don’t use the bank. Again, if you’ve been relatively financially stable in your life, you might be surprised by just how many people this applies to: According to the FDIC, around 6.5 percent of U.S. households don’t have a bank account at all (during the height of the recession, that number was 8.2 percent, or 14.1 million adults). 

The number of “underbanked” people, however, is much higher, at 19 percent. This means people who have a bank account, but also use other institutions to handle their money. Let’s call this the alternative banking system: check-cashing businesses, pawn shops, money-transfer services — you get the idea. There’s a big market out there for this.

And the business takes a fee for cashing checks, I assume?

Correct. It’s not huge — it varies by state law, and many stores’ rates vary by the type of check they’re cashing. Check Center, a California business with locations in the Bay Area and San Diego, charges 2.25 to 2.99 percent for payroll checks (depending on if the check is over or under $2,000), and 2.99 to 3.99 percent for government and tax-refund checks.

In other words, when you hand over a payroll check that says $1,000, the teller will examine the check closely, maybe call the issuer to make sure funds are available, and eventually you’ll walk away with $977.50 cash. As you can see, the business doesn’t make a lot of money off of each check, but it’s a volume business, and there’s a lot of volume to it! It’s an $11 billion industry, with more than 14,000 stores in the U.S.

Still seems like a rip-off considering banks do the same thing for free.

Well, yes: It’s yet another part of what’s known as the poverty tax, i.e., all the endless extra fees you face if you have bad credit or no savings — the hurdle faced every day by people who, say, lost their bank accounts due to too many overdraft fees or other rule breaches. 

But there are other more complicated, yet still rational reasons people go to these places, too. Penn professor Lisa Servon worked in a check-cashing business in the Bronx for four months back in 2012. She’d studied low-income communities for 20 years, and she already knew that, contrary to conventional wisdom, poor people don’t actually make poor decisions with their money: They know where every penny goes. So she set out to find out why sensible, frugal people would use institutions like this.

One great example from her experience was a local contractor. He cashed a $5,000 check, incurring a $97.50 fee for doing so. Why throw away a hundred bucks in fees? Because, she points out, it was probably the guy’s best option given his situation: He’s likely got undocumented workers as employees, who don’t have bank accounts of their own and need to be paid in cash. Maybe he needs the money now — either to be able to pay his employees on payday, or for supplies he needs immediately in order not to be undercut by a rival contractor and lose the whole job. A bank, as we all know, requires you to wait 48 hours for the Goddamn check to clear if you deposit it into your own account. Like Ben Franklin said, time is money, and sometimes waiting for money can literally cost you money. So in a situation like this, the contractor was making a rational choice. 

And are these fees all clearly marked?

Yes, which is another item for the “pro” column: There are no hidden fees. When you walk inside of most check-cashing businesses, you might think you’re at a fast-food restaurant, as the rates and items are all clearly marked on a board above the counter. You could say that overall there’s more honesty, or at least fewer surprises, than you find at a bank.

Banks aren’t exactly renowned for their honesty in the first place, though.

True, but there is generally a measure of trust involved at a bank, so it’s almost as if the fees at a check-cashing business take the place of that trust. Banks trust that you will not, say, write a check you can’t cash. You can go ahead and do it, but the bank will wallop you with fees if you do as a penalty for breaking the bank’s trust (let’s call these the rules of transaction).

Is it too simplistic to say that these places exist just to prey on poor people?

Like almost anything to do with money, there’s definitely some nuance. It’s not exactly a parasitic relationship, as professor Servon found — maybe more like a symbiotic relationship. The businesses provide a necessary banking-like service — one, it should be reiterated, that’s straightforward and, fees aside, convenient, which are two things you cannot say about most banking experiences. Considering all the hidden charges that come with a bank, as well as the overdraft fees that hit people who are living dollar-to-dollar the hardest, you can forgive these people for being distrustful of banks. Sure, check-cashing business take a cut of your hard-earned cash, but it’s all overt and above board. The customer walks away with no surprises and money in their pocket. As Servon noted, some services, like money orders, can even cost less than at a bank. 

You say it’s all above board, but what kinds of laws do they have to follow?

Lots! They’re fairly tightly regulated by the Department of the Treasury, which is probably a good thing. Because the Treasury is worried about them becoming magnets for money laundering, establishments have to follow a lot of rules. They also have to register with the IRS.

Some of those places advertise payday loans — what are those?

Some check-cashing businesses do indeed offer payday loans, which are short-term loans (say, two weeks) when you need money before you’ve received payment. The payday loan operation will require you to have a checking account, though, or at least the ability to get a check from somewhere. You write the business a postdated check for the borrowed amount, plus the fee. Say you borrow $100 — you write them a check for $115. When the payback is due, the payday loan business cashes the check you wrote them. Payday loans are regulated by states, and most states don’t allow you to borrow more than $1,000.

Payday loans also deservedly get a bad rap for preying on poor people and those with horrible credit (as getting a more legit loan is the primary purpose of credit). That $100 loan cited above has an APR of 391 percent! Their astronomical interest rates are up there with those of a loan shark, and not paying them back in full can land you in an inescapable debt-riddled black hole, at the bottom of which you’ll find a rabbit snare, a bunch of sticky glue and a steel trap. The Consumer Financial Protection Bureau estimates that up to 60 percent of payday loan borrowers are trapped in this cycle of never being able to pay back the payday lender, and within a few months, a borrower can be stuck owing more in interest than the amount they borrowed.

Do people ever scam or rob these places?

It’s not advisable to try: They have cameras on customers, and they often verify their identity and social security numbers. Like a bank, they’re designed and built with security in mind, and employees are supposed to follow best practices to minimize the chance of robbery.

But overall, these places are… kinda on the level?

They take a cut for themselves, sure, and practices like payday loans can be suicidal for customers. But conventional banks do a hell of a lot of shady shit too — some of it with far wider and more devastating consequences — yet we still seem to regard them more highly than these alternate players in our banking system. Neither is anywhere near perfect, but in the end, check-cashing businesses provide financial services to people who, for all sorts of reasons, absolutely need them, and who the regular banks have absolutely no interest in helping.