Up and down the blocks of poor neighborhoods, you're guaranteed to see one specific type of storefront: check cashing shops. They'll cash your checks, wire your money abroad and even sell you a cell phone plan. They cater specifically to people living paycheck to paycheck. Their “good deals” attract customers, but their fees and interest rates ensure months of debt—usually a significant loss to those who participate.
You're far more likely to see a check cashing store than a bank in many low-income neighborhoods and if you ride the bus or subway, chances are you'll see ads for these alternative financing shops on there too.
Are check cashing spots yet another way that big businesses prey on the poor and waste their money? The answer is actually more multifaceted than you might think. In truth, check cashing businesses offer several important services to clients including easier access, familiarity, lower transaction fees, and freedom from garnishing.
A few years back, City Lab ran an article by an urban policy professor at the New School who has thoroughly studied “alternative financial services,” and it blew so much of what I thought I knew about check cashing businesses out of the water. First, the author, Lisa Servon, does away with the idea that people who use these services lack a bank account. In fact, although “17 million nationwide are unbanked […] 43 million have a bank account but also continue to use alternative financial services providers.”
Here are 4 key reasons why people may choose to use a check cashing service and actually get better service than they might at a bank:
Why would someone choose to spend extra money to cash a check when he could just take it to the bank? The City Lab article points out that, for one thing, banks aren’t easily accessible in many neighborhoods. For example, in Manhattan there’s about one bank for every 3,000 residents. The South Bronx (one of the poorest regions in the nation), however, has only one bank per 20,000 residents. In 2014, Al Jazeera reported that "between 2008 and May 2013, more than 1,800 bank branches shut down nationwide — 93 percent of them in low-income neighborhoods." This gap in banking services for lower income people is the result of decades of redlining, and it is one reason that alternative financial services appear in such neighborhoods.
In my own experience, check cashing spots have a much lower barrier to entry than banks. While I do belong to a bank and conduct most of my financial business through that, I sometimes stop by the check cashing place to pick up quarters for laundry because it's easy and close by. Coincidentally, when my city, Milwaukee, transitioned from paper bus fares to electronic cards last year, it selected dozens of locations around the metropolitan area from which to sell the new electronic cards. These places were chosen because they had the highest volume of transactions (meaning theoretically, that they were some of the most used businesses in the community and would thus be convenient, accessible spots from which to sell.)
Guess which businesses were selected to sell the cards? A whole lot of payday loan/check cashing stores (plus several grocery stores). It turns out these institutions are very popular.
Without banks to serve them (and with the trending depersonalization of banking nationwide), Lisa Servon notes that people use check cashers because they are friendly, trustworthy faces in a local business—not unlike the postal worker who drops off your mail in the morning or the librarian who works down the block. When a big money bank has deemed you unreliable or unworthy, chances are you’ll seek service closer to home with employees who actually value your patronage.
3. More transparent (and sometimes lower) costs
Beyond the case for familiarity with your check casher though, the most eye-opening piece of the City Lab story comes in the revelation that over the long term, alternative financial services are probably not more expensive than traditional banking for the people that use them. Servon writes, “The rapidly increasing cost of bounced checked fees and late payment penalties has driven many customers away from banks, particularly those who live close to the edge.”
In a related article in the New Yorker, Servon explains, "It happens that banks offer a de-facto short-term, high-interest loan. It’s called an overdraft fee. An overdraft is essentially a short-term loan, and if it had a repayment period of seven days, the APR for a typical incident would be over five thousand per cent." Suddenly, paying $2.50 to get your paycheck cashed at the end of the month doesn’t seem so unwise. And even though the fees may seem high at a check cashing joint, at least they are clearly laid out. At a traditional bank, you often have to wade deep into the fine print before you find out how much an overdraft fee or a late fee will cost.
4. Freedom from Garnishment
Another reason that many low-income individuals choose a check cashing spot over a traditional bank is bank account garnishing. If you owe significant sums (court fees, evictions/late rent, child support, etc.) and you keep your money in a bank, it's sometimes fair game for those whom you owe to snatch up your money. But if you avoid the bank altogether, your money stays with you. I'm not passing a moral judgement on that, but it's easy to see why someone with a lot of debt that he or she can't afford to pay might prefer to use a check cashing place over a bank.
Without a doubt, pay day loan providers and check cashers are capitalizing on their customers’ lack of sound banking options, but they’re also making up for an honest lack of banks. So, do these alternative financial options benefit our cities at large? On the one hand, alternative financial services perpetuate a paycheck-to-paycheck lifestyle for many residents in our cities because they don’t offer the option to save money. Alternative financial operations do nothing to change the reality of poverty, but they might make it a little easier to manage.
The existence of alternative financial institutions indicates a persistent need for options beyond traditional banking.
In truth, both traditional financial institutions and check cashing businesses prey on the poor. A better middle ground between banks and check cashing spots may be community development financial institutions (CDFIs) and credit unions who have a mission-based approach to helping low-income customers.
I have a friend who is starting a credit union in Milwaukee and I'm inspired by the way the community has risen up in support of this, knowing how transformative it could be for their finances and independence. The process of getting it started is no small feat though. It has already been a multi-year process and has required hundreds of thousands of dollars in pledges.
There's no easy answer to the question of making banking more accessible, but until we do, check cashing spots will continue to be a popular option for many Americans.
(Top photo by vinceesq)