Finance on the Fringe: America's check cashers don't exploit the poor; they serve them

Reason, April, 2002 by Michael W. Lynch

"Millions of low-income, 'bankless' Americans may soon become part of the financial mainstream, thanks to the recent amendment of an obscure law, advances in banking technology, and proposals to use supplemental savings programs to strengthen social security," predicted UNG's Michael Stegman, who wrote a book on the effort. Rubin said the accounts "could have significant economic and social effects."

Then again, maybe not. In fact, the accounts have had no economic or social effects, something Rubin should have foreseen. Here's how the product designed by the Treasury Department works: The federal government sends banks a one-time setup subsidy of $12.60 for every account they open. Banks can charge customers up to $3 a month and must provide at least four withdrawals and four balance inquiries per month, either at ATMs or at teller windows. These accounts don't offer checking services, which means that bill paying must be done with cash or money orders. Given that most banks charge between $3 and $6 each for money orders, the total could really add up.

Such accounts are really good for only two groups: people who can't get a traditional bank account due to a history of bounced checks, balance problems, and the like; and suckers willing to overpay for minimal services. There appears to be little interest among either group. By last spring, just over 11,000 people nationwide had purchased these accounts.

Market Response

While federal efforts to meet the needs of low-income Americans continue to fail, entrepreneurs continue to experiment with services that people may actually use. 7-Eleven is trying out automated check cashing machines in a few of its stores. Other companies offer payroll debit cards for people who don't purchase financial services from banks. The highest-profile entry into this market is Visa, which rolled out a payroll card last July in a joint effort with some of the nation's largest banks.

A few banks and credit unions are dipping their toes into the check cashing business. Liberty Bank has operated a check cashing store in Middletown, Connecticut, since 1994. In New York City, Bethex Federal Credit Union, a small operation designed for low-income customers, partnered with RiteCheck Cashing in 2001. A bigger experiment is under way in Southern California, where Union Bank of California is operating 12 of its own check cashing outlets, known as Cash & Save, and partnering with Nix Check Cashing to offer banking products in Nix's 47 branches. At least for the time being, these new, hybrid models are the cutting edge of innovative financial services geared to low-income Americans. Which also explains why they've proven controversial among consumer advocates, who retreat to their check-cashers-exist-because-banks-abandoned-the-poor fantasy and decry the new hybrids.

"The need for check cashers arose when banks left inner-city neighborhoods," says Shelley Curran, a policy analyst at the West Coast regional office of Consumers Union. "It's a little ironic that this market was created because banks fled--and now they are coming back in an entirely different fashion."