Money Markets : The Check-Cashing Industry Prospers and Adds Services in Low-Income Areas

On a busy afternoon in this city’s mostly Latino south end, the signs of commerce are everywhere. Shoppers pick out roasts at the Carniceria La Paloma meat market and carry bundles of laundry into the Rapidwash.

But to get a true sense of how business is transacted, one needs to stop by el cambio de cheques --the check-cashing store. There are three locations to choose from in this tiny strip mall on south Main Street. The drug and liquor stores each have one on the premises, and there’s Transpacific Check Cashing in a storefront next to the meat market, under a sign emblazoned the red, white and green of the Mexican flag.

Queta Montellano is in line at Transpacific to cash a $146 check, for which she must pay a $1.46 fee. The 22-year-old has a checking account at a nearby bank, but says she always stops here out of “habit.”

Behind her is Jose Angel Rodriguez, who says he prefers to cash the payroll check from his job as a machine operator here because “the bank is too far.”

And Agustin Rodriguez, who is unrelated, drops in to wire $500 to family in Mexico. “It’s a lot of money,” he says of the $60 to $70 monthly commissions he pays for the services. But because there are few other places where he can wire money so easily, “I don’t have a choice.”

It is a scene being repeated in low-income neighborhoods across the Southland. Long derided as “poverty banks” where illegal immigrants cash checks without identification, the check-cashing industry has become a fixture of the inner city, where it offers a variety of financial services.

The landscape has become so inundated with check-cashing outlets--an estimated 600 in Los Angeles and Orange counties among about 5,000 nationwide--that owners have diversified into everything from income tax preparation to lottery ticket sales. In essence, they have become one-stop financial institutions for the poor and convenience-seeking middle class.

They have grown so quickly over the past decade that California has taken new steps to regulate them. Starting this year, operators must have background checks and be fingerprinted. Fees are now limited to 3.5% of the face value of most payroll checks.

And the check-cashing business has become lucrative enough that banks have started looking at them as serious competition. One bank chain has opened its own check-cashing centers, while others are trying to figure out how to lure away the immigrant Latinos who form the core customer base.

But the check-cashing industry remains dogged by a stereotype that refuses to die: that it takes advantage of the poor by charging too much.

“Latinos use them . . . and are being ripped off like everyone else,” said Tip Phabmixay, who wrote a report on the check-cashing business for Consumers Union in San Francisco.

A family would pay sales fees of $300 a year, the report said, based on a typical 2% commission on $15,000 annual income, about a third more than bank service fees on an account.

The industry, however, counters that check cashers provide a convenient alternative to banks, which often have long lines at the teller windows and high charges for bounced checks.

“I think anyone who provides services to the poor will always be highly scrutinized because” of those who contend that the poor are always overcharged for services, according to Rick Burningham, president of Cerritos-based Any Kind Financial Services Center.

Having found a market among the poor, check cashers are looking to sink deeper roots by broadening their appeal to middle-class wage earners. Burningham, whose chain is one of state’s largest with 62 stores, said 70% of the customers have bank accounts and use the centers for convenience, and he wants more of them.

“A lot of our customers are average-income workers. We get them in and out faster,” he said.

It’s a clear sign of widespread acceptance, he said. And that acceptance has been a long time in coming.

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Check cashers are not new. Some large companies, for instance, have offered windows where workers could cash their paychecks as soon as they were handed out. Certain liquor stores and supermarkets have routinely cashed payroll checks for their customers.

But in the past decades, there have been a number of changes that help set the stage for the industry.

First, banks started fleeing the inner city because branches there are less profitable. Mergers among banks led to more abandoned branches. Consumers Reports said that 288 branches closed between 1985 and 1992 in California.

Check-cashing outlets began to fill the demand left by the banks, especially in the inner cities, which were being populated by increasingly poorer residents during the 1980s.

Check cashing was a business that attracted entrepreneurs because it only took about $60,000 to get started and offered a steady clientele that enabled it to turn a profit within a few months.

Soon, everyone seemed to be getting into the check-cashing business. One Anaheim gas station and mini-market advertises, for instance, “Sea Food--Fax--Diesel--Check Cashing” on the signs outside.

But the small operators are inefficient, opening the way for chains. Larger operators lowered their costs and minimized fraud by using centralized computer systems.

With so many check cashers on the streets now, operators have responded to flattening profits by expanding into new services such as money wiring, which has proven to be a boon with Latino customers. “In the last three years or so, [American Express] Money Gram has taken off,” said Randy Hamilton, regional manager for the eight-store Chex Cashed chain in Orange County.

Besides money wiring, check cashers are looking to move into areas that have been traditionally dominated by banks as a way to expand. For instance, the industry is supporting a bill pending in the Legislature that would give it limited ability to make certain short-term loans.

The practice is called “payday loans,” in which customers could write a personal check to themselves for cash, even though they didn’t have enough money in their bank accounts to keep the check from bouncing. The check casher would simply hold the check until the customer’s payday, when there is enough money in the account for it to clear--and extract a hefty fee for the service.

“I think it is outrageous,” Consumers Union’s Phabmixay said.

Check cashers view the idea as a service that could “fill the gap” for low-income customers who need help between paychecks and that performs a function traditional lenders are not interested in.

Such short-term loans would be no match for the kind of community-building lending for which banks are known. Some worry that check cashers threaten to supplant the traditional role of banks.

“A bank encourages savings, and that is the key to development of any community,” said Robert Gnaizda, executive director of the Greenlining Coalition, a San Francisco-based group trying to pressure banks to open branches in the inner city. “The check-cashing system is not well run and it is overpriced, yet it is flourishing.”

Congress has considered regulating the check-cashing industry nationally, but so far the industry has been successful in fending off most bills. “We feel that it’s an issue that should be decided in each state,” said Henry F. Shyne, executive director of the National Check Cashers Assn. in Paramus, N.J.

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The industry has attracted attention from regulators partially because of its downscale demographics and occasional brushes with the law. Check cashers were the focus of two recent cases in Orange County, for instance.

In one, a county drug task force infiltrated Fiesta Xchange in Santa Ana and Check Cashing in Placentia and arrested their owners, charging that they were engaged in narcotics-related money laundering. Similar accusations of money-laundering have closed some San Diego County check-cashing centers in recent years.

In the other recent case, state banking regulators seized Izalco Express Services in Costa Mesa and charged that the check-cashing center was accepting deposits from its mostly Latino immigrant clientele.

That alone is illegal, but examiners found that the center had only $678,000 in assets to cover nearly $1.4 million in deposits from 900 customers, according to court filings. Customers, many of whom were apparently intending to send their savings to their home countries, were given what amounted to IOUs for repayment before the state intervened, and the fate of their accounts is pending in Orange County Superior Court.

Because of those kinds of problems, the check-cashing industry was recently re-regulated in California. Under a law that took effect Jan. 1, check-cashing business owners are fingerprinted to see if they have been convicted of any felonies involving fraud or deceit.

But at the same time the government has been giving its due to the industry by making it a distributor of services for the poor. Los Angeles County’s Department of Public Social Service announced plans to stop mailing payments and instead create a system by which they would be available for pickup at 70 designated check-cashing outlets, some of which already distribute food stamps. The plan for picking up checks is designed to cut down on the robbery of mail carriers.

These ideas are welcomed in the check-cashing industry--although there is plenty of squabbling about which operators should get the contracts.

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Bankers have taken notice of check cashers’ gains, though they have traditionally not paid a lot of heed to that area of business. Check cashing doesn’t make much money for banks compared to other services. The American Bankers Assn. estimates that personal checking accounts for less than 5% of a bank’s total profit.

“A lot of bankers will tell you it would be very difficult to maintain a branch based solely on [checking] transaction fees,” said association spokeswoman Virginia Stafford.

Yet immigrants who open checking accounts with meager savings are the profitable customers of tomorrow. As their income grows, they will become candidates for a bank’s more lucrative offerings, such as house and car loans, credit cards and other services.

Immigrants generally are distrustful of banks, given the poor reputation that financial institutions may have had in their home countries, Consumers Union’s Phabmixay said. But Vietnamese immigrants tend to use check cashers less than Latinos. “They realize they are too expensive” and may instead cash checks through a friend or relative with a bank account.

Many customers of check-cashing centers say they would prefer to deal directly with banks, if they had the chance.

With two young boys and a live-in girlfriend to support on $300 a week, Juan Carlos Carbayal can hardly afford to spend $15 or more just to cash a month’s worth of paychecks. But the Anaheim man said he has little choice.

“I lose money for nothing because I don’t have an account at the bank,” Carbayal groused as he stepped into his pickup truck outside the Chex Cashed center on Harbor Boulevard. “I need to make it possible to put money in the bank because, if I don’t, I can’t put more money in my pocket.”

Carbayal said that rent and utilities consume more than $700 of the $1,200 he earns a month as a machine operator in Santa Fe Springs, leaving little for food and day-to-day expenses. A bank account right now, he said, would be out of the question.

Yet there are banks that would readily court a customer like Carbayal. Aggressively marketing directly to Latinos has led to a 50% increase in new deposits at the Bank of America branch in south Santa Ana, said manager Joe Ortiz. On a Monday afternoon, 25 customers are lined up at the teller windows.

Their small accounts are more expensive to service, and they tend to prefer personal service and eschew automatic teller machines because they are afraid of being robbery targets, Ortiz said.

“There is a lot of education that needs to be done” to let Latinos know of the advantage of banks, he said. A new worker on a gardening crew, for instance, will be told by co-workers about a check-cashing store and never visit a bank.

But the branch has been trying reach out with features like an entirely bilingual staff, advertising in Latino media and a Cinco de Mayo promotion that offered 150 free bilingual checks and five minutes of free international telephone calls. So many of the customers come in with children that Ortiz created a corner of the branch where a videotape of “The Lion King” is continuously shown on a TV set.

With a basic checking account costing $4.50 a month that allows for the writing of 10 free checks, Ortiz said he really doesn’t see the check-cashing outfits as major competition because they cater to those who are illegal immigrants or have other problems that shut them out of the banking system.

Though he openly courts their customers, check cashers have some customers who are “people with an identification problem” who would be unable to open a bank account anyway, Ortiz acknowledges.

Check-cashing center owners talk little of patronage by illegal immigrants. They say most customers are attracted by convenience or culture, not the fact that they can cash checks without a driver’s license.

Culture comes into play because banks are either not used, or distrusted in some of the former homelands of immigrants. “The banks are so inaccurate and so hard to work with that most deal in cash,” Burningham said.

Many may be working for Southland factories in which paychecks are held until after banks close on Fridays, leaving check-cashing stores as the alternative for quick cash before Monday, he said.

To cater to Latinos, he said, 75% of his more than 320 employees are Spanish speakers, compared with about 35% when he started 13 years ago.

Check cashers say they have built the same kind of loyal customers that patronize banks. They can find tellers, instead of having to deal with automatic teller machines. And if they were to bounce a single check with a bank’s checking account, the cost would be far more than they would spend in a single month at the check cashers.

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At least one bank has entered the check-cashing business directly. Union Bank of Los Angeles opened four centers around the Southland. All are inside existing branches, except a free-standing center in Huntington Park. It has distant plans to open one in Orange County.

The average check-cashing center has become profitable in as little as 11 months, faster than a new bank branch, said Richard C. Hartnack, vice chairman of Union Bank in Los Angeles. But they haven’t made the kind of money that a big operation like Union needs to make a venture worthwhile.

“It hasn’t been quite the dramatic money-making operation I would have hoped,” Hartnack said. “So far the gross profit margin is smallish” compared to other potential endeavors for a bank the size of Union.

He acknowledges, however, that there appears to be a clear need for check cashing by a group that, for one reason or another, apparently doesn’t want to use banks.

“Clearly these people are voting with their feet for a different form of financial services,” he said, asking rhetorically, “How can we fill that need and make a responsible profit?”

Union started charging 1.25% to 1.85% to cash checks and bet that it could introduce more sophisticated security measures to hold down the number of bad checks and attempts at fraud that can make the check-cashing business a dicey proposition.

Despite the relatively small profits, Harnack seemed impressed with the short span it took to become profitable.

“It is one of the fastest-growing areas of the bank,” he said.

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Revenue Sources

Check-cashing establishments provide a variety of financial services but most of their revenue comes from cashing checks. Their customers tend to be younger and about two-thirds are minorities. The who and what of check-cashing services nationwide:

Services Check cashing: 85% Money transfers: 6% Money orders: 7% Other*: 2%

* Includes transit tokens, notary public services and passport photos

Client Demographics

Age 18-29: 37% 30-39: 25% 40-49: 20% 50-59: 12% 60 & older: 5% No response: 1%

Race Black: 46% White: 34% Latino: 18% Other: 2%

Source: Towers Perrin; Researched by JANICE L. JONES / Los Angeles Times

Easy Options

Convenience, in a word, sums up the major attraction that check-cashing services have for customers. Reasons the services are used, nationwide: Convenient hours: 30% Saves time: 23% Easy access: 16% Banks too crowded: 14% Other: 17%

Source: Towers Perrin; Researched by JANICE L. JONES / Los Angeles Times