Why? Mostly because you know upfront exactly how much you’ll pay for the services of a check-cashing company, and there’s no chance of being on the hook for fees after the transaction is done. A bank account is more complicated, requiring the customer to maintain a certain balance—or at least something more than a negative balance—and there’s always a concern about hidden fees hitting you down the line.
In USA Today’s story about the roughly 60 million Americans who are “unbanked” (they have no bank accounts) or “underbanked” (they have bank accounts but sometimes use alternatives to cash checks), there are several explanations given for why some folks utilize services that charge them 1% to 3% per $100 to cash a check on the spot. One reason is convenience: Many check-cashing outfits are open 24/7, and so if you work late hours and want cash immediately after leaving the job with paycheck in hand, such a company is waiting for your arrival. Another reason is that a check-cashing operation offers instant cash—and instant gratification. There is generally no period required to wait for a check to clear. Want your money? Here you go, but we’ll take a slice of it before you’re off on your way.
A third reason surprised me, but I suppose it shouldn’t have: Many people, having been burned in the past by monthly fees, overdrafts, and other charges they didn’t anticipate, simply distrust banks and prefer the upfront fees of a check-cashing company instead. Why did this surprise me? I guess I’ve always regarded pawn shops, liquor stores, and other check-cashing storefronts as somewhat sleazy operations; they’re generally found in rundown areas of towns, and they seem to prey on people who need money desperately and quickly—so much so that they’re willing to hand over 3% or so of their paycheck so that they don’t have to wait a few days. But apparently many consumers feel that today’s banks take advantage of them in even worse—and sneakier—ways. Per USA Today:
People who use check-cashing stores don’t have to worry about hidden fees, says Edward D’Alessio, general counsel for the Financial Service Centers of America, a trade group. “Our industry is more transparent with respect to terms and conditions of products and services than banks have ever been,” he says. “When you walk into one of our locations, our costs are all clearly posted.”
Yvonne Lopez, 62, of Newhall, Calif., says she started using cash for all her transactions because she was tired of surprise fees. She also believes the banks were responsible for the financial meltdown. “I just don’t trust them,” she says. “They charge you for everything.”
Of course, there are plenty of ways to maintain a bank account and not get hit with fees all the time. But seeing as so many people prefer alternatives partly because they just don’t trust banks, the banks out there clearly have some work to do. The consumer with a fresh paycheck in hand knows exactly what he’s getting into when he heads to a check-cashing storefront. The relationship isn’t quite as transparent at a bank, which is bad news for banks—because people aren’t going to give their money to somebody they don’t trust.