Money Markets : As Check Cashers Flourish in the Inner City, So Does Scrutiny, Criticism of the Industry

By CHRIS WOODYARD

May 28, 1995 12 AM PT

TIMES STAFF WRITER

SANTA ANA —

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 one tiny strip mall on south Main Street. The drug and liquor stores each have a cambio on the premises, and there’s Transpacific Check Cashing in a storefront next to the meat market, under a sign emblazoned with 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 (no relation to Jose) 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 service. But because there are few other places where he can wire money so easily, Rodriguez adds, “I don’t have a choice.”

It is a scene 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.

Of the estimated 5,000 check-cashing outlets nationwide, about 600 are in Los Angeles and Orange counties. Their owners have diversified into everything from income tax preparation to lottery ticket sales. In essence, the storefronts have become one-stop financial institutions for the poor and convenience-seeking working class.

Locally, the business’ growth has been so strong that state lawmakers have taken new steps to regulate check cashing. 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 business has become lucrative enough that banks have begun looking at the outlets as serious competition. Union Bank has opened its own check-cashing centers, and other banks are trying to figure out how to lure away the immigrant Latinos who form the core customer base.

But the 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,” says Tip Phabmixay, who wrote a report on the check-cashing industry for Consumers Union in San Francisco.

To cash payroll or government benefit checks totaling $15,000 a year, a family would pay sales fees of $300, the report said, based on a typical 2% commission--about a third more than bank service fees on an account.

The industry counters that check cashers provide a convenient alternative to banks, where customers often encounter 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,” says 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 the state’s largest, with 62 stores, says 70% of his customers already have bank accounts and use the centers for convenience, not for lack of alternatives.

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

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

But in the past decades, a number of changes occurred that helped set the stage for the industry’s growth.

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

Entrepreneurs were drawn to fill the gap because it only took about $60,000 to get started, and a profit could be turned within a few months. Larger operators lowered costs and minimized fraud by using centralized computer systems.

With so many check cashers out there now, operators have responded to flattening profits by expanding into new services such as money wiring, which has proven popular with Latino customers. The industry is also supporting a bill pending in the Legislature that would give it the limited ability to make short-term loans.

If the “payday loan” measure becomes law, customers could write personal checks to themselves for cash, even if they didn’t have enough money in their bank accounts to keep the checks from bouncing. The check casher would simply hold the check until the customer’s payday, then clear it for a hefty fee.

“I think it is outrageous,” says Phabmixay of Consumers Union.

Though proponents call such loans a needed service, critics say they would be no substitute for the kind of community-building lending for which banks are known.

“A bank encourages savings, and that is the key to development of any community,” says 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.”

The industry has attracted attention from regulators partly because of its downscale demographics and occasional brushes with the law.

In one recent case, an Orange 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 drug-related money laundering. Similar accusations have closed some San Diego County check-cashing centers in recent years.

State banking regulators recently seized Izalco Express Services in Costa Mesa and charged that the check-cashing center was illegally accepting deposits from its mostly Latino immigrant clientele.

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; the fate of their accounts is pending in Orange County Superior Court.

Because of such problems, the check-cashing industry was recently re-regulated in California. Under a law that took effect Jan. 1, owners of check-cashing businesses 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 making the industry a distributor of services for the poor. In response to a tide of crimes against letter carriers, Los Angeles County’s Department of Public Social Services announced plans to stop mailing welfare payments and instead distribute them through 70 check-cashing outlets--some of which already distribute food stamps.

Though bankers have traditionally paid little heed to the check-cashing business--personal checking accounts represent less than 5% of bank profits, according to industry estimates--they have recently begun to take notice of the gains.

After all, immigrants who open checking accounts with meager savings are the potentially profitable customers of tomorrow. And 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 says he has little choice.

“I lose money for nothing because I don’t have an account at the bank,” Carbayal says as he steps into his pickup outside the Chex Cashed center on Harbor Boulevard in Anaheim. “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 says 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 says, would be out of the question.

Yet there are banks that would readily court a customer like Carbayal. Aggressive direct marketing to Latinos has led to a 50% increase in new deposits at the Bank of America branch in south Santa Ana, manager Joe Ortiz says.

On a Monday afternoon, 25 customers are lined up at the teller windows. Their typically small accounts are expensive to service, and they tend to eschew automated teller machines because they are afraid of being robbery targets, Ortiz says.

Nonetheless, the branch has been reaching out with features such as an entirely bilingual staff, advertising in Latino media and a Cinco de Mayo promotion that offered 150 free bilingual checks and five minutes’ worth 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, including 10 free checks, Ortiz says, he doesn’t see the check-cashing outfits as major competition. The centers, he says, cater to illegal immigrants and others who may be shut out of the banking system.

Owners of the outlets counter that their 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 not trusted in some of the immigrants’ homelands. Many other customers, the operators say, work for Southland factories where paychecks are held until after banks close on Fridays, leaving check-cashing stores as the alternative for quick cash before Monday.

At least one bank has entered the check-cashing business directly. Union Bank has four centers, three inside existing branches and a free-standing outlet in Huntington Park.

On average, the centers have become profitable in 11 months, faster than a new bank branch, says Union Bank Vice Chairman Richard C. Hartnack. But they haven’t made the kind of money that a big operation like Union needs to make a venture worthwhile.

“Clearly these people are voting with their feet for a different form of financial services,” Hartnack says. For banks, the question is, “How can we fill that need and make a responsible profit?”

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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 orders: 7%

Money transfers: 6%

Others*: 2%

Client Demographics

Age:

18-29: 37%

30-39: 25%

40-49: 20%

50-59%: 12%

60 & older: 55