Fringe Banking Services Cash In
It's nearly the first of the month and the lines are as long as a bank's on payday. On this post-holiday season afternoon, this typical check-cashing outlet plays host to a single dad -- three boys in tow -- cashing his welfare check; a woman who readily acknowledges she's getting paid under the table; a migrant farm worker; and a man who has a bank account but just wants to cash his personal checks and rush off to the supermarket.Check-cashing services are trading cash for payroll and government checks to the tune of $60 billion a year nationwide -- for a fee. Also joining in the "fringe banking" niche serving people who need money fast are pawnshops and high-risk mortgage and car lenders. Rent-to-own stores, too, are a booming business. Some of the interest rates and fees make consumer advocates cringe as they accuse the fringe-banking industry of cashing in on the poor, but meanwhile many of the people they serve see the places as a necessity, as traditional banking gets further out of reach for low- and moderate-income people living paycheck-to-paycheck. Check-cashing services, particularly, are the convenience stores of banking. But, like getting your milk and six-pack at the corner 7-Eleven, you'll pay more for the privilege.People like Brenda Wagner say it's worth it. Wagner gets her Supplemental Security Income check direct-deposited at an establishment called "Check Cashers." (Starting this month, all federal payments have to be electronically delivered -- a daunting prospect for those with no bank account.) But this month, her normally $747 check's a little short: Wagner had already used the increasingly popular "payday advance," paying more than 10 cents on the dollar to get some of her money two weeks early. She needed cash for holiday gifts, and food, including premium chow for her six cats."It definitely costs more, but I'm definitely glad it's here," Wagner said of the check-cashing service. "I don't think the fees are bad at all. Plus, at the bank, They're friendly and all that, but they're robotic about it. Here, they treat you like family." But still, why give up 2 percent or more of your income to get cash-in-hand? "Because I screwed up my credit through the bank," Wagner says readily, adding hers to the 13 percent of the nation's households that don't have bank accounts. Darrin Deatherage, who runs a day care business, uses Check X-Change because "It's easy, they're friendly and I don't have to deal with a lot of people." Even though it cost him $2 to cash a $20 personal check, and he has a bank account, he didn't give it a second thought. "I can walk right across the street to the grocery store," Deatherage said. "It's worth it." Samantha Davis, also using Check X-Change, said simply: "You use them because you don't have a bank account. They take a lot of money out of your payroll and personal checks," she said, but added, "It's more personal than a bank."John Caskey, author of the book Fringe Banking: Check-cashing Outlets, Pawnshops and the Poor, said such services have become big business in the last decade or so, serving mainly people with low to lower middle-class incomes, making up to $30,000 a year: "people living paycheck-to-paycheck." Caskey, an economics professor at Swarthmore College in Pennsylvania, said that in the mid-1980s -- ironically as the economy was supposed to be doing well -- "both check-cashing services and pawn shops really started taking off." Factors included a shift in income distribution -- the shrinking middle class -- as "people with lower education levels saw their real incomes fall," Caskey said. At the same time, bank fees were increasing, and high consumer debt made it harder for many people to get traditional loans. There has been a philosophical shift as well in recent generations, said Earl Lui, senior attorney with the advocacy and protection agency Consumers Union's West Coast office in San Francisco. "People are more strung out on credit now," he said, with bankruptcies at an all-time high. "People are into instant gratification and borrow too much money and get into trouble." Observers debate whether there's an even greater socioeconomic link: In large cities, banks have been accused of closing their branches in low- to moderate-income neighborhoods to focus on more profitable clientele. There, fringe banking services proliferate. But Caskey said that's a minor concern, since both banks and check-cashing services appear not far from most areas. He sees benefits in the services, including convenience in the midst of a "cash-and-carry" economy in which a family's paycheck comes in, bills are paid with little left over, and the cycle continues. "A bank is really not for you if you have no savings," Caskey said. "Most banks don't really want that customer, and they don't price things to make them attractive to that customer. On the other hand, it's a very expensive way to live," he added. But many people seem to find banking via check-casher very necessary. Check X-Change manager Deborah Cope accepts a man's electric-bill payment, shoving a couple of hard candies under the glass window along with his receipt. Her work area is decorated with dolphin figurines -- many of them gifts from customers. The store's been open for more than four years, and like most businesses that base themselves on check-cashing, Check X-Change also offers money orders, photo identification, Western Union money-sending services, passport photos, utility payments, pre-paid phone cards, postage stamps and, perhaps not surprisingly, lottery tickets. But the cornerstone is check-cashing. There's a $3 sign-up fee, and 3 percent is deducted from government and payroll checks; 3.5 percent if you don't have your identification. Business, commercial, insurance, travelers and cashiers checks, and money orders are charged 6 percent, and 10 percent is taken from personal checks. The charge for payroll advances of up to $50 is $7.50; it's $15 for up to $100. "It really provides a good service to the public," said Cope, whose clientele includes "all kinds; all walks of life," from transient truck drivers to college students cashing grant and loan checks to the leisure class on the run. And at certain times cash is needed more than at others: "Around the holidays it's been gangbusters," she said. Some people live month-to-month; still others -- regardless of income level -- live last month-to-this month: One paycheck isn't enough to take the family through to the next, and the gap must be filled somewhere. Cope said she enjoys her customers, and it's rare that someone tries to pull one over on her staff or complains about the fees. "We try to make our customers feel comfortable," she said. "A lot of people come here because they can't open a bank account." Banks, she said, "are trying to cater to the high-dollar people because that's where they make their money. We just cater to everybody. I think we're friendlier than banks," she said, and "We don't try to tell people how to live their lives. People know what they're doing when they come in here."But some consumer advocates denounce the industry as taking advantage of the lower classes and point out the irony in financial institutions like American Express having backed national check-cashing companies that are traded for big bucks on the stock market. Meanwhile, banks are requiring minimum balances to avoid fees and have strict requirements for cashing checks. Lui, of Consumers Union, blames both the banks and those segments of the fringe banking industry that have the opportunity to make money off people's low pay or poor planning. There's a bigger problem at play, Lui said, if "somebody has to borrow 300 bucks by their next payday. Should you be lending more money to someone in that situation?" he asked. "It just puts people on this debt treadmill. It puts them in this situation where they're always going to be short. They think they'll be able to pay it off ... I don't think people know what they're getting into." And with payday advances, Lui assessed, "They're cashing a bad check for you."Consumers Union is pushing states to cap check-cashing fees at 1 percent of a check's value and working toward legislation to better regulate fringe-banking services, from check-cashing to rent-to-owns. Businesses should exercise personal responsibility, Lui said. The most troubling elements of the $200 billion-plus a year so-called "poverty industry," at least to consumer advocates, are the car finance companies and other businesses that offer high-interest loans to lower-income people, often based more on equity in their property or possessions than on their income and ability to repay. In some ways, those businesses bank on their customers' usually poor credit and lessened likelihood to pay off the new debt.Consumer advocates say that by targeting those with "sub-prime" credit histories, some lenders are taking advantage of people who may be so intent on getting the loan that they may not clearly see the high interest rates and tacked-on fees that often come with it. But as for check-cashing services and pawnshops, Caskey said he thinks the customers realize they pay more than they would at a bank. "It's like running into 7-Eleven," he said. "Do people really understand that it's more expensive than using the grocery store? They offer their service to anyone, but it is disproportionately [to] people with poor credit records," he added. Lui said that especially when it comes to payday advances, "I think it's people who are desperate and feel they have nowhere else to go. If you work out the math, it's really staggering how high the interest rates are."Now you see these national chains that have moved into these markets because they see so many Americans have not done as well as they used to be [doing]," he added. "Corporations have seen that there is this new market up there that they can exploit." Caskey also hinted at a societal shift: "Places that used to cash your check, like the little grocery store, are less inclined to do that now."Nationwide, publicly traded chains of pawnshops -- a world staple for thousands of years -- are cropping up to serve the new era. Caskey said the image of pawnshops has improved over the years, but the typical loan is still about $70 or $75, which would cost the borrower about $9 plus fees. Like other forms of fringe banking, Caskey said, "There are people that use them frequently for loans, and there are people who use them infrequently." Consumer advocates predict that fringe banking services will continue to succeed. If people can't or don't want to use a traditional bank, Caskey advises, "If they could, they ought to build up savings and repair credit records. It would help if a lot of people's incomes went up," he added. "In some cases it's bad budgeting behavior. In other cases it's just hard with a moderate income to meet your expenses." Lui suggested that consumers with bad credit start by getting a secured credit card -- set up with a savings deposit -- to develop a new credit history, or see if they qualify at a credit union."People just have to plan better and budget better," he said, and a 20-percent APR credit card may not be all that bad. Meanwhile, he said, banks should commit themselves to going after the low- to moderate-income market. "It's all part of this bigger trend of the middle class disappearing or shrinking," Luis said; "this two-tier society" where people with less money pay more to get the same services.