Banking Takes Interest in Check-Cashing Industry

Union Bank of California is expected to announce today that it is buying into Southern California’s largest check-cashing operation, accelerating the banking industry push into a controversial and profitable business that targets low-income neighborhoods.

By purchasing 40% of Nix Check Cashing, the state’s third-largest bank is seeking a foothold in low-income areas such as South-Central Los Angeles and Santa Ana, where there are few bank branches but plenty of check-cashing operations that have thrived by charging stiff fees.

Check-cashing outlets have become a vital part of the economic life of many inner-city and heavily immigrant neighborhoods, where residents have distrusted financial institutions. Nix operates 47 storefronts that are frequented by 600,000 customers.

The Union Bank deal comes as other banking giants are also moving to reach out to some of the 25 million people in the U.S.--including 4 million in California--who don’t maintain bank accounts. A growing number of banks are betting they can boost profits and, in some cases, attract new customers, by expanding into these underserved neighborhoods.

But rather than opening new branches, many financial institutions are jumping into the check-cashing business themselves.

Wells Fargo, the state’s No. 2 bank, is teaming with the nation’s pawnshop king to roll out hundreds of check-cashing automated teller machines this year. Even American Express, which targets high-end customers, said last month it will begin offering check-cashing services for the first time through its recently acquired ATMs in 7-Eleven stores nationwide.

The strategy has prompted concern from consumer groups, who say this isn’t what they had in mind when they prodded banks to return to inner cities.

“Banks should be entering the fray as banks, not as check-cashers,” said Elizabeth Renuart, staff attorney at the National Consumer Law Center in Washington.

Renuart found it ironic that banks, after closing their branches in low-income neighborhoods, thus relegating the poor to using check-cashing outlets, are now trying to profit from the same high-fee business they helped create. That could perpetuate a two-tiered system of delivering financial products that discriminate against the poor, Renuart said.

“The unanswered question is whether banks will be any better for consumers than the check-cashers have been,” she said.

Citibank, for example, is partnering with a national check-cashing trade group to distribute debit cards for welfare recipients to receive government benefits electronically. But the monthly fees are about the same as, or potentially higher than, what a low-income consumer would have to pay to cash paper checks.

Still, officials at Union and other banks insist their push into the check-cashing industry will increase competition, lower prices and improve service.

Wells Fargo officials noted that the fee to cash a paycheck at one of their new ATMs averages 1.75% of the check’s amount, versus an average 3.28% at Dollar Financial Group, one of the nation’s biggest check-cashing chains.

Nix charges 1.85%, plus 75 cents per transaction.

“It may be a scrappy industry, but you can run a scrappy industry honestly and ethically,” said Richard Hartnack, vice chairman at Union.

Hartnack stressed his bank is more interested in forging long-term customer relationships than reaping short-term profit.

By paying $6 million for its stake in Nix, Union hopes to convert many of the Carson firm’s clients into steady Union Bank account holders. Union also will offer some of its financial products through Nix.

“Other banks seem to be focusing on the [upscale] market, such as investment products,” Hartnack said. “We are challenging ourselves to develop financial services that we can provide at the lower spectrum.”

A recent Federal Reserve survey found that nearly 10% of the nation’s households don’t deal with banks, usually because they don’t have enough money, can’t afford the fees or don’t trust banks.

These so-called “un-banked” consumers have sparked an explosion in the check-cashing industry, which has tripled in the last five years to a $60-billion business with about 6,000 outlets nationwide.

John Bryant, founder of nonprofit Operation Hope in South-Central, has been an outspoken critic of the check-cashing industry, but he said he decided to support the Union-Nix deal because he believes the bank will help “clean up” the unsavory practices of some check-cashers.

“They will create a whole new standard for the check-cashing industry,” said Bryant, whose South-Central group will receive a 5% stake in the Union-Nix partnership in return for providing credit counseling, home-buying assistance and other services.

Union began experimenting with check-cashing services in 1992, working with community groups to develop specially targeted products that would appeal to low-income consumers. For example, Union developed several “transitional” accounts, which combine a savings account with discounts on check-cashing and money orders. Then the bank opened 15 check-cashing offices, called Cash & Save, in low-income neighborhoods.

Union officials were encouraged by the pilot program after about 40% of the check-cashing customers eventually became traditional bank account customers, according to Yolanda Brown, senior vice president at Union.

With the Nix deal, Union will continue to operate its Cash & Save outlets separately, but the bank will roll out the same products to all Nix locations. Under the terms of the deal, Union has the right to buy the rest of Nix’s holding company, Navicert Financial, in 10 years.

Nix Check Cashing, which was founded by the Thomas Nix family in 1966, began looking for a bank partner last summer so it could broaden its array of financial products.

“This is a terrific opportunity for the bank, for us, and the community,” said Tom Nix Jr., chairman of Navicert. “It’s a strategic alliance that will bring banking back to the inner city.”

The deal also puts Union into an even more controversial business of making high-interest, payday-advance loans, a fast-growing product that consumer groups say exploits the poor.

Payday advance loans, which range from $100 to $200, enable cash-short consumers to borrow against their next paycheck--but at interest rates that are often as high as 15% for just two weeks, or $30 for a $200 loan.

Because of the new partnership with Union, Nix agreed to lower the interest rate on some advance loans and adopt more consumer-friendly terms, Hartnack said.

Last month, consumer groups, including California Public Interest Research Group, urged state legislators to regulate the fast-growing industry.

The groups say that many check-cashers are allowing consumers to roll over or renew the high-priced loans repeatedly until fees surpass the original loan amount.

In response to such concerns, Union officials have persuaded Nix to permit only one renewal of its payday loans and to cut the interest on the rollover loan to 10%.

Separately, Wells Fargo, based in San Francisco, also is hoping to capture a chunk of the check-cashing business through its InnoVentry Corp., a joint venture with Cash America International in Fort Worth, Texas, the nation’s largest pawn loan company.

The two companies plan to install 1,700 check-cashing ATMs nationwide by the end of the year. The machines will debut in California at Ralphs supermarkets and Circle K stores. But unlike Union, Wells Fargo says it doesn’t plan to turn its check-cashing customers into account holders.

Three years ago, the bank learned that delving into check-cashing can be fraught with risks.

A contract to cash welfare checks for Los Angeles County residents turned into a public relations nightmare when bank lobbies became packed with low-income residents.

The bank tried to reduce the traffic by handing out vouchers for outside check-cashing firms, but critics accused the bank of trying to shuffle the poor out of their lobbies. The contract was not renewed.