Finance on the Fringe

America's check cashers don't exploit the poor; they serve them.

That Anna has a problem becomes clear shortly after I sidle up next to her on the cold stone steps of the First Union Bank in downtown New Haven on a chilly fall afternoon. In fact, the 56-year-old woman has many problems -- including, she's quick to point out, more than a few missing teeth. But the problem I'm interested in today is unrelated to dentistry. It's Anna's supposed lack of access to the insides of the very building on whose steps she sits. She is, you see, one of the "unbanked," a clumsy word that rose to some prominence inside the do-gooder wonk circles that swirled in and around the Clinton administration.

Like many Americans who don't purchase financial services from traditional banks, Anna used to do things the conventional way. "I just stopped putting it in," she says of a former savings account. For the last four years, Anna, who earns her living working temporary jobs, has cashed her paychecks at one of New Haven's 10 check cashing stores, such as X-Bankers, which sits half a block away. She purchases money orders to pay her bills and stashes her savings in a cookie jar. When it comes to large purchases, "I just save up for it," says Anna.

She's not alone in declining to purchase financial services from a bank. Sitting next to Anna on the bank steps is her 34-year-old daughter Alvina, who also chooses not to have a bank account. Anna and Alvina are joined by nearly 10 million American families -- 9.5 percent of households in 1998 -- and millions more in countries as diverse as England, Hungary, and South Africa, all of which have recently been reported to have problems with the unbanked.

Not that Anna thinks it's a problem. If she did, she'd empty her cookie jar and march into First Union and open a no-minimum checking account for $5.50 a month. If she wanted to park $100 in the account indefinitely, the fee would drop to zero.

For $2 a month, she could purchase a savings account, which would pay her 0.5 percent interest. If she left at least $200 in the account, she'd pay nothing. But she prefers to use check cashing joints. "They make it easy," says Anna, "and we don't get no lip from nobody."

Whatever Anna believes, plenty of other people think she has a problem -- and that she's either in denial or isn't sophisticated enough to recognize her real financial interests. Academics, consumer activists, and government officials conduct studies and write books exploring why so many Americans don't frequent banks. They propose ways for the government and nonprofit groups to coax the unbanked into the system. Exactly who and what are to blame for Anna's condition -- and the growth of the industry that serves her -- are common topics. How governments ought to regulate the industry to ensure that it doesn't take advantage of the Annas of the world is never far down the agenda.

At their best, the critics are motivated by a wonkism that earnestly wants to pull a few policy levers and convince poor people to save. At their worst, which is much of the time, they are driven by a do-gooder-knows-best mentality that can't conceive of anyone not longing for the middle-class institutions they themselves cherish. Their worldview is governed by a series of related and reinforcing assumptions: Greedy and powerful corporations systematically take advantage of folks who are incapable of managing their own lives; markets are inherently exploitative; and poor people shouldn't have to pay for the financial services they consume.

Poor Habits

Here's the irony: Markets are actually succeeding quite well in serving the financial service needs of Americans with low and moderate incomes. Such people have far more options and choices than they did 20, 30, or 40 years ago. To be sure, the steel bars and Plexiglas that cover the teller windows at check cashing outlets may not be pretty or genteel, especially when compared to the marbled lobbies and high ceilings of conventional banks. They may offend bourgeois sensibilities and notions of what's just. But they also undeniably provide a unique and valuable service to their customers. Contrary to the opinions of critics who would regulate or legislate "fringe banking" out of business, the booming check cashing industry represents a market success worthy of celebration, not a market failure that demands more regulation.

For the critics, the key issue is that saving habits are statistically linked to bank accounts. People who purchase bank accounts are more likely than those who don't to save in ways the government can easily measure. People who save are less likely, over time, to be poor.

"If you go to a check casher instead of opening a bank account, you are never going to get ahead," says Edmund Mierzwinski, a consumer advocate at the U.S. Public Interest Research Group (U.S. PIRG). The Progressive Policy Institute's Anne Kim writes in an August 2001 study of the unbanked, "A bank account is the first step toward giving low-income Americans access to the mainstream tools for wealth creation now taken for granted by the middle-class."

Some of the facts that activists use to build their case are obvious. The unbanked tend to be poor. Eight out of 10 unbanked families earn less than $25,000 a year, one learns from Kim's study. Four out of 10 pull in less than $10,000 in on-the-books income. Yet the study overlooks other equally obvious points. For instance, to a family earning $10,000 a year, where to park their savings might not be a top financial concern.

Consumer activists have created a fantasy world in which greed and racism have conspired to deny the poor traditional banking services. The story line depicts a glorious past when everyone conducted business at community banks, which didn't charge the neediest for the services they provided. Partial banking deregulation in 1980, according to this tale, caused banks to merge, become huge, and pull out of unprofitable areas. Greedy check cashers and payday lenders rushed in to fill the void.

"The reasons check cashers exist in these communities is because banks don't," says Arthi Varma, a policy activist at the California Reinvestment Committee, a consortium of nonprofits that pressures banks to serve low-income communities. Other activists blame bankers for being rotten businessmen, neglecting millions in profits that would come from reaching out to potential customers with moderate and low incomes. "Banks are bad marketers," asserts U.S. PIRG's Mierzwinski. "That's a problem check cashers have taken advantage of."

This story contains some truth. Banking deregulation, for example, did cause banks to rethink, retarget, and reprice products. (The result, however, has been more, not fewer, financial options.) But the critics' larger narrative is flat-out wrong. Check cashers and other low-end financial service providers don't exist because of some market failure, or because poor people suffer from false financial consciousness. Check cashers didn't move en masse into the buildings abandoned by banks. The industry has existed since employers first started paying with checks in the 1930s and owners of stores and bars figured they could make money cashing payroll checks. It is thriving today because it serves people's needs.

The roughly 11,000 check cashing outlets in the U.S. have evolved into financial portals where lower-income Americans cash $55 billion worth of checks each year. (By contrast, banks clear $48 trillion in check payments annually.) The stores offer a range of services, few of which are offered by banks -- and none of which banks can offer at competitive prices. Some banks are slowly moving into the market niche. But if they are going to succeed, they'll end up looking and acting more like check cashers than banks.

Check Out the Choices

Consider the block where Anna sits in downtown New Haven. A diverse ecology of financial services flourishes on the street, with banks and check cashers both present. That same proliferation of options is also evident a mile and a half west on Whalley Avenue, a bustling, albeit low-end, New Haven artery that's packed with dollar stores, pharmacies, fast food franchises, auto repair shops, antique stores, banks, and yes, check cashers. Shaw's Supermarket, which opened in 1998, anchors a new shopping center complex, a 10-minute walk from the center of the Yale campus. A Hollywood Video, Rentown, and laundromat share the large parking lot and serve the low-income neighborhoods along this section of Whalley Avenue.

Check King sits across the street from Shaw's, which houses a Fleet Bank with extended hours. Shaw's operates its own check cashing outlet as well, for those who have successfully cleared two checks at the store and have a Shaw's discount card. It charges nothing to cash patrons' checks and sells money orders, lottery tickets, prepaid phone cards, and Western Union wire transfers. If you wanted to cash checks on the cheap -- combine the best of banks and check cashers, getting immediate access to your money without a fee -- Shaw's could be a one-stop shop.

If lack of access to banking services is what drives people through the doors of check cashers, then the one-two punch of Shaw's check cashing outlet and its Fleet Bank branch should have knocked Check King out of business a long time ago. Or, at the very least, bruised it. Yet according to Jim Consiglio, who has owned and operated Check King for the last 11 years, he hasn't been touched. Nor have the banks that sit just a few blocks away from Check King affected Consiglio's business, which is a family affair. (His parents and three sons help him shovel cash under a Plexiglas partition to Check King's customers.)

"I am not in competition with banks at all," explains Consiglio, an energetic 50-year-old who sports a diamond earring and tightly trimmed goatee. "They don't do what we do. They're in the lending business and the savings business. Cashing checks costs them money."

It's hard for some people to accept, but Consiglio is right: While some services overlap, the core businesses of banks and check cashers are distinct. Check cashers advance people -- pretty much anybody -- money for checks, a service for which they charge a fee. Banks, in general, give their customers access to their own money. While some banks may immediately cash some government checks and many will cash checks drawn on their own accounts, they are not in the check cashing business. If a bank customer shows up on Friday with a $500 paycheck and $50 in her account, she'll get $50. If she shows up at Check King, she'll get $490. "We put our own money on the counter every day," says Consiglio. "We take risks that banks don't."

Selling Quick Cash

This immediate access to cash -- the storeowner's cash -- explains why many people who have bank accounts also use check cashers. "It's easier -- you're in and out in a hurry," says 30-year-old Nancy, as she leaves X-Bankers with cash in hand. She's headed next door to get her nails done. She has a checking account that she sometimes uses to pay rent. Other times, she uses money orders.

The difference between conventional banking and check cashing explains why a Fleet Bank opening across the street didn't cut into Consiglio's business. It also explains why Consiglio felt it when Connecticut State Check Cashing Services, a privately held chain that operates 19 stores, opened a store a half-mile west of Check King. "There's no way around it," he says. "A lot of people live up there."

Check King, like other check cashers, is a combination of many familiar businesses: bank, Mail Boxes Etc., corner store and video arcade. Consiglio sells smokes at $4 a pack, buys gold and diamonds, and dispenses candy and sodas from machines. Like the check casher up the street, he'll wire in customers' utility payments for free and sell them envelopes, stamps, and money orders to pay other bills. He rents mailboxes and sells phone cards. While we talk for nearly an hour on Christmas Eve, three men come in to play his Ms. Pac-Man. Others purchase Lotto tickets.

Protesting Profits

Cashing checks accounts for 65 percent of Consiglio's cash flow, and it's the core service that brings in customers, who cash a total of around $500,000 a week. He charges 2 percent of the face value of payroll checks, 1 percent for government checks. Like other check cashers in Connecticut, where fees are capped by the state at 2 percent, he won't cash personal checks. He relies on the telephone and on an eye trained by expensive experience to ferret out bad checks. Any check not generated by a computer is suspicious, as is a low number on a check. (The latter indicates a fresh company whose payroll account may or may not be funded.) For suspicious checks, he'll call the issuing bank or company. But he's open long after banks are closed, so he often has to make snap judgments. He says fewer than one in 1,000 checks bounce. He's come by his skill the hard way -- from a pile of bad checks in the back office.

While Consiglio's Check King has never been picketed by protesters, he's aware of the gripes against his sort of business. "We are the black sheep of the financial service industry, no doubt about it," he says with a smile. "I'm not standing on a soapbox saying I'm doing anyone a favor. I'm making money. Activists can yell all they want."

And yell they do, if not at Consiglio personally, then at his fellow check cashers. Or at banks for not operating as check cashers and, in some cases, for operating as check cashers. Or at anyone else who provides financial services in the low-income market. (See "Legal Loan Sharking or Essential Service?," page 38.)

"You don't have to be too smart to open up a check cashing store," says U.S. PIRG's Edmund Mierzwinski, who calls banks "greedy" and doesn't believe that banks and check cashers operate different businesses. "There are tremendous opportunities at the margins that banks have left for these guys to make a lot of money preying on the poor."

Testifying last June before the House Committee on Financial Services, Margot Saunders, managing attorney at the National Consumer Law Center, pulled out all the rhetorical stops. She was inveighing against allowing check cashers to participate in the Treasury Department's Electronic Funds Transfer program, which seeks to provide direct deposit accounts for federal employees and benefit recipients. Saunders talked of how "unbanked individuals have been sucked into the underworld of check cashers," and of "captive customers" who are "unsophisticated, often illiterate." She decried "financial apartheid."

"Already," she said, "upper- and middle-income Americans enjoy the safety and convenience of a highly regulated banking industry that provides competitive prices and is closely supervised to limit improper activities….Many poor people, on the other hand, are relegated to fringe bankers who are unregulated, unsupervised, and routinely charge exorbitant rates in the uncompetitive financial services market that exists in the low-income community."

This view is common, self-contradictory, and belied by reality. The financial service arena isn't segregated; it's richly diverse. Banks may be safe and convenient for upper- and middle-income Americans, who get paid regularly with direct deposit, pay their bills with checks, and move infrequently. But that doesn't mean banks are convenient for everyone, especially folks who work odd hours, have erratic incomes, and need access to their money as soon as they earn it.

In any case, even middle- and upper-income Americans have been purchasing financial services at places other than banks for years. "When the Community Reinvestment Act took effect [in the late 1970s], roughly two-thirds of Americans' long term savings were in CRA-covered institutions [i.e., banks or savings and loans]," notes Michael A. Stegman in his 1999 book Savings for the Poor: The Hidden Benefits of Electronic Banking. "Today," says Stegman, a former Clinton administration official who heads the Center for Community Capitalism in the Kenan Institute of Private Enterprise at the University of North Carolina, "less than 30 percent are, and the migration from the conventional banking system to mutual funds, money market accounts, and other savings vehicles outside of CRA continues un-abated."

In other words, it's not just people who don't earn a lot of money who are purchasing financial services more tailored to their needs. Swarthmore economist John P. Caskey, who coined the term "fringe banks," notes that upscale private banking, personalized financial advice and execution for the wealthy, boomed in the 1980s along with check cashers. "Just as people at the high end of the income distribution have financial needs that banks find better to meet in a specialized office or branch of the bank, people at the low end have specialized needs," says Caskey, author of the 1994 book Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor. "You can think of check cashing outlets as tailoring services to meet those needs."

Bank Failure

So why don't low-income people choose to purchase their services from conventional banks?

They aren't physically excluded from banks. Nor are branch offices hard to find, as many charge. Every non-agenda-driven study on the issue shows that most check cashers operate close to banks. According to the Federal Reserve Board in its most recent Survey of Consumer Finances, a mere 1.2 percent of the unbanked say that lack of convenient hours or locations is what keeps them from opening a checking account. A 1999 study by the Federal Reserve Bank of Boston found that in New England banks outnumber check cashers in the areas they both serve. A 1998 Federal Reserve Bank of New York study of New York City found that 71 percent of check cashers share a zip code with at least one bank and 19 percent coexist with more than 10 bank branches. "You could put 1,000 bank branches in low-income areas, and check cashers would still thrive," says Swarthmore's Caskey.

Clearly, it's not because check cashers don't face competition. Rather, their customers conclude that they not only are more convenient and offer more services but are less expensive to boot. This must surely come as a surprise to activists, who often paint check cashers as just one notch up from loan sharks.

Reform-minded studies of what it costs to be unbanked are typically abstract accounting exercises that conflate being unbanked with being dependent on check cashers -- and being "banked" with paying only the minimum monthly fees with no bounced-check or ATM fees (an unrealistic assumption, even for the middle class). For example, a 2001 Fannie Mae Foundation study claims that "fringe services for cash conversion and bill paying would cost an average $20,000-income household between $86 and $500 a year, while the same services at a bank would cost only $30 to $60." A 1997 study by the Consumer Federation of America, which works closely with U.S. PIRG and the National Consumer Law Center, found that the annual cost of cashing a $320 weekly paycheck ranged from $160 to $960. And a 1999 report by the Massachusetts Division of Banks claims that individuals pay 3.3 to 40.8 times as much to turn checks into cash at a check casher than they would at a bank offering low-cost checking accounts.

But when less myopic researchers actually talk to the people who don't purchase any financial services from banks, they find that the unbanked spend very little to turn their checks into cash. Constance R. Dunham, a senior economist at the Office of the Comptroller of the Currency, the federal bank regulator, conducted two massive field studies of New York City and Los Angeles. To her surprise, Dunham found that two out of three unbanked individuals paid nothing to get cash. They either had no income, were paid in cash, cashed their checks for free at a supermarket or at the bank that issued the check, or had a friend or relative cash their checks. A mere 11 percent of the unbanked spent more than $100 a year to cash checks. Add in costs for money orders and bill payments -- the other service a checking account provides -- and a whopping 17 percent of the unbanked spend more than $100 a year on financial services.

Given that the break-even point for banks is roughly $100 a year per account, it's hardly a mystery that banks don't aggressively market to the small percentage of Americans who don't already buy their services. "The survey suggests that many people may be unbanked, not because they face barriers to obtaining bank accounts," concludes Dunham, "but because they can better economize on the costs of financial services without having a bank account."

First Bank of Sisyphus

This point hasn't fully sunk in with policy advocates, who work D.C. hours to bring "universal" banking to America. They have wielded a variety of policy tools over the years, none with much success. The big club on the supply side is the 1977 Community Reinvestment Act, which compels federally insured banks to operate in unprofitable low-income neighborhoods. But physical access just isn't a problem.

There are no federal requirements that banks actually offer low-cost accounts, a fact that causes much pain among the advocates. But it wouldn't matter if there were. Most banks already offer low-cost accounts, and so long as an individual hasn't abused a checking account by chronically bouncing checks, he is free to sign up. Seven states regulate where the feds don't, mandating low-cost "lifeline accounts." These laws have had little effect. Many banks voluntarily offer products that are even less expensive than the government-designed accounts.

In the latter years of the Clinton administration, Congress gave the Treasury Department $30 million to develop a program called "First Accounts." This effort, still in the works, will funnel taxpayer money to credit unions, community groups, Indian tribes, and even labor unions. In turn, these groups will do such innovative things as provide financial education, engage in advocacy research on why even more money is needed, and offer low-cost accounts and no-fee ATMs.

The most ambitious effort to increase bank use, Electronic Funds Transfer 1999 (EFT '99), came from Robert Rubin's Treasury Department. EFT '99 was prompted by a 1996 law that encouraged the Treasury Department to pay federal wages and benefits by direct deposit.

"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 UNC'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."

The California Reinvestment Committee opposed the Union Bank of California and Nix Check Cashing partnership. "If a bank is coming into a low-income community, it should come in as a bank, not a check casher, which often provides substandard services in terms of getting into mainstream banking, building assets, building wealth, those types of things," says the committee's Arthi Varma. She is especially concerned that Nix's customers won't be able to figure out the difference between banking and check cashing services. Says Varma: "People go to check cashers to conduct their financial transactions. At a typical check cashing store there's not a banking window. People are not going to have the propensity to walk toward that window and ask the questions and find out what's going on."

Tennessee Valley Banking Authority

Here's a question with a definite answer: What do consumer advocates really want? The fundamental reality is that financial services, for rich and poor alike, cost money. What activists really want is for banks to make their wealthier customers subsidize the poor even more than they already do under the Community Reinvestment Act. "The point is that banks don't offer services at low enough prices, and we are trying to encourage them to do so," says U.S. PIRG's Mierzwinski. "I think banks should be treated somewhat as if they are public utilities, because banks are in fact recipients of tremendous government benefits."

That's not going to happen. Banks operate in a world of diverse choices, and their customers will quit buying their services if they are priced too high for some consumers in order to subsidize others. Indeed, this has already happened, as the massive flow of money from traditional bank accounts into money markets and mutual funds attests. As important, banks are not seen as public utilities, and it's unlikely they ever will be viewed as such. Most of all, though, consumers, even low-income ones, are not idiots. All evidence suggests that people do know what's good for them and seek out the financial services that best meet their needs. That entrepreneurs like Check King's Jim Consiglio earn a living from meeting those needs is a sign that markets are working -- not just for the Consiglios of the world but for the low-income folks who fill his store every week.

Yet even as markets become more sophisticated and entrepreneurs develop more-nuanced products to meet the financial service needs of the poor, there will be plenty of people in Washington wanting to do something about it. That is something you can take to the bank.

Just don't expect to see Anna, the 56-year-old temp worker in New Haven, waiting in line. Like thousands of other people of very modest means, she prefers to spend her financial service dollars at check cashers. I ask her why.

"To save us from the agony of going to a bank, we go to cash and check," she says. "It's cheaper. It saves us aggravation. I'd rather go to cash and check and keep steppin'."