Report
65
Number
Jan 01 2001

Check Cashing and Savings Programs for Low-Income Households: An Action Plan for Credit Unions

This report shows how credit unions and their service organizations (CUSOs) can provide low-fee transaction service and special savings programs to modest- and moderate-income households that are currently using check-cashing outlets and other fringe banking businesses. Using the business strategies detailed in this report, credit unions can generate income from providing these services. Credit unions can also make it possible for households now using fringe banking outlets to obtain vital financial services at prices lower than they currently pay. Most important, credit unions can help many of these households make the transition to traditional low-cost credit union deposit accounts and loans.

John P. Caskey
Swarthmore College
Susan J. Brayman
Denver, Colorado
Report Number 65

Executive Summary

This report shows how credit unions and their service organizations (CUSO’s) can provide low-fee transaction service and special savings programs to modest- and moderate-income households that are currently using check-cashing outlets and other fringe banking businesses. Using the business strategies detailed in this report, credit unions can generate income from providing these services. Credit unions can also make it possible for households now using fringe banking outlets to obtain vital financial services at prices lower than they currently pay. Most important, credit unions can help many of these households make the transition to traditional low-cost credit union deposit accounts and loans.

What is this research about?

Millions of low- and moderate-income American households do not obtain payment and credit services from mainstream financial institutions. These households are commonly referred to as the“underserved,” reflecting their relative absence from traditional deposit-taking institutions. They are more likely than the general population to rent their homes, and to be headed by a racial or ethnic minority group member, and someone with a modest education. In most cases, they have almost no month-to-month financial savings and, frequently have impaired credit histories.

Many of these households obtain payment and credit services from the alternative financial sector (AFS) — including check-cashing outlets, payday lenders, small loan companies, pawnshops, rent-to-own shops, and car title lenders.

The disadvantages of the AFS to the consumer are:

  • Costly services.
  • Less convenient services requiring frequent face-to-face interaction with service providers.
  • Unregulated or ineffective business practices in many states.
  • Vulnerability to opportunistic business practices. Because AFS customers have less education, economic resources, and little political voice, they are far more exposed than the patrons of mainstream financial institutions.
  • Little encouragement to take the steps necessary to make the transition to lower-cost providers of financial services.

The AFS sector does a better job than mainstream financial institutions of structuring its products and operations to meet the needs of households with little or no month-to-month savings. In the case of payment services, for example:

  • Customers with little or no savings risk $30–$40 in charges if they write a bad check. Therefore, a checking account can bean unsuitable alternative for them.
  • At most deposit institutions, customers can’t cash a payroll or government check without waiting for it to clear if they have no savings.
  • For a fee of 2% –4% of the value of a payroll or government check, check-cashing outlets give their customers immediate access to funds.
  • Check-cashing outlets sell low-cost money orders, stamps, and envelopes to enable their customers to pay bills conveniently. 

The AFS sector also does a better job than mainstream financial institutions of managing risk associated with lending to households with impaired credit records:

  • AFS lenders, such as pawn shops, rent-to-own shops, and auto title lenders, lend on the value of items that can be reclaimed and liquidated quickly and at low cost.
  • Payday lenders and small loan companies make small, very short-term loans with face-to-face repayments, which are timed to coincide with receipt of payroll or government checks. They also respond immediately and aggressively to missed loan payments.

What are the credit union implications?

Credit unions can serve A FS customers effectively, by operating in a way different from either AFS businesses or traditional depository methods.

In this report, we develop business plans and budgets for credit unions to offer check cashing and bill paying services as part of a branch or shared branch that also provides traditional credit union products. Adding check cashing and bill paying services to traditional services would increase the profitability of these branches rather than reducing it. By providing these services credit unions can build relationships with the underserved that they can use to help them to take the steps necessary to access low-cost financial services. The combination of traditional credit union products plus check-cashing and bill-paying services can make a branch or shared branch financially sound in neighborhoods where a traditional branch or shared branch might not be viable.

Also, since check-cashing and bill-paying services at the branch would be offered via a CUSO, these services could be provided to members.

Credit unions can lend prudently to AFS customers with acceptably flawed credit records, and can help those with seriously flawed records to clean up these records over time.

Some AFS customers can qualify for a credit union loan, and more could qualify for a loan with risk-based pricing. But for AFS customers with seriously flawed credit, loans are not the most appropriate solution. In these cases, credit unions should offer products and educational programs that help households with minimal savings and seriously impaired credit histories to accumulate financial resources and clean up their credit record.

This report provides the rationale and strategy for providing check-cashing and bill-paying services in conjunction with a traditional or shared branch. The appendix gives realistic budgets for this type of operation and a financial analysis of the approach, based on the conclusions above.