Do you remember the day you got your first paycheck? Remember how excited you were? Finally, all that hard work paid off and you probably couldn’t wait to cash your check. What a time!
For many people, that check likely wasn’t physical but rather deposited directly into a checking account. However, for many others, that simply isn’t an option.
In the United States, roughly 18% of households are classified as either unbanked or underbanked, meaning they struggle to keep sufficient funds in an account to remain open (globally, that number increases to 31%). So what is a worker to do when payday comes and they have nowhere to deposit it? Understandably, many look to cash-checking stores.
But what are cash-checking services, why do people use them, and what makes them different from traditional banks? Today we’re taking a deep dive into the world of check cashing to answer those questions, weigh the pros and cons, and look at some better alternatives for the next time that paycheck rolls in.
What Are Check Cashing Stores and Why Do They Exist?
A check-cashing store is a provider of alternative financial services that allow customers to cash checks (including payroll, government payments like a tax refund, and others) without requiring a bank account. These storefronts can be found in a variety of communities and often offer other related financial services as well including electronic bill payments, money orders, and payday loans.
There are some benefits to cash-checking stores that we’ll look at below, but the main reason these stores exist is to provide a much-needed service to people who don’t have access to (or simply don’t trust) traditional financial institutions. Many banks aren’t willing to cash checks from non-customers as a safety measure to prevent fraud and those that do often include fees. As a result, check-cashing stores offer a valuable service to a specific portion of the population.
How Do They Work?
As the name suggests, check-cashing stores work by cashing checks — no surprises there. Customers come in with a check from an employer, government, or other third party and pay a predetermined fee to receive funds in a timely manner. Typically, customers have the option to receive their money in the form of either physical cash or via a prepaid debit card, depending on the provider.
To help prevent and reduce fraud, cash-checking stores implement various forms of verification and security measures. The specifics of these are not entirely known as that would make the fraudulent activity easier, but you can expect to include some of your information like identification or proof of employment to the store.
Since customers are really just converting checks into spendable form and aren’t actually purchasing something from the store, service providers make money from the fees they tack on. These fees vary depending on the provider but typically come in the form of a flat fee or a percentage of the check itself (more on this in the cons section).
Who Uses Cash-Checking Services?
As noted earlier, the primary customer base for cash-checking stores are unbanked and underbanked people. The term “unbanked” refers to people who don’t have any checking or savings accounts and generally do not interact with traditional financial service providers like banks. This could be for a variety of reasons.
In many cases, it’s due to a less-than-stellar financial history with traditional service providers. If you’ve ever found yourself switching bank accounts often and accruing overdraft fees and negative account balances with different banks then you’ll already know what happens.
After a while, banks will decide to not work with certain individuals, making it nearly impossible to open a regular bank account. If you’ve had problems with ChexSystems in the past, then you’re likely to suffer from this issue.
Others simply don’t trust or like traditional banks and credit unions. Simple as that. If you’ve had bad experiences with banks involving a mountain of unexpected or hidden fees being tacked on to your account, then you likely already know this feeling. Sometimes shoddy behavior from big names leads people to become wary of these institutions — and they’re not without reason.
However, the unbanked and underbanked aren’t the only people using these services. For some, a check may not deposit immediately or they may only have access to partial funds right away and wait for the check to officially clear before gaining access to the rest.
In a non-emergency, this isn’t a big deal. But what if you have bills due and can’t afford to wait an extra 48 hours even though you have payment in your hands? That’s where a cash-checking store comes into play. Unlike waiting for a check to clear, these service providers typically allow you to leave with cash in your hands the same day.
Cash-Checking Stores: The Good
A cash-checking store will always have customers. Here are some of the reasons why.
1. No Bank Account is Required
This is one of the primary benefits. Cash-checking stores offer an important service to those who don’t have bank accounts. While you may be working or receiving other payments, you won’t be able to access funds without an account or a cash-checking service.
2. (Nearly) Instant Access to Money
Another primary benefit is the nearly instant access to funds from a check. In most cases, customers can enter a cash-checking store with identification and check in hand and leave with their money during that very same visit. Contrast that to waiting days for a check to clear or only having access to partial funds that one may experience with more traditional banking options.
Similar to other alternative financial service providers, cash-checking stores are often open beyond regular banking hours. In fact, many are open 24/7, making it easy to stop in and cash a check at any time rather than going in the middle of a workday where you may not even have the opportunity to go.
4. Up-Front and Transparent Fee Structure
Though the cost of many of these fees is included in the “bad” portion of this list, there’s a legitimate reason to prefer the style of service cash-checking stores provide. Upon entering a cash-checking store, providers are very clear and transparent about how much their services cost.
Whether it be a flat fee or a percentage, you won’t be wondering how much you need to pay or be hit with unexpected fees that were buried deep in a stack of legal jargon and paperwork. For many people, it’s refreshing to see a transparent financial transaction. What you see is what you get.
Cash-Checking Stores: The Bad
But there are reasons people should strongly reconsider the regular use of check-cashing stores.
1. High Fees
While they may be transparent, cash-checking stores are significantly more expensive than traditional options. For those who are banked, institutions generally don’t include any fee for cashing and depositing checks. But if you’re visiting a check-cashing store, expect to pay anywhere between 1%-12% of the check’s value in fees.
Additionally, some storefronts require a one-time fee to become a member and use their service. The actual cost will depend on the store of choice and varies depending on the type of check and the amount a check is written for, among other factors. These fees can add up quickly and eat into your earnings. It’s your money. You earned it. Why pay additional money just for the right to access the money you’ve already made?
2. Uninsured Cash, Higher Risk
Unlike a traditional bank account, cash stored at home is not FDIC-insured. While some customers may choose to accept payment in the form of a prepaid debit card, many still opt for a physical cash payment. Whether that’s being stored in a shoebox, under the mattress, or in a safe at home, customers run the risk of completely losing their savings due to natural disasters, theft, or accidents at home.
3. Lack of Access to Other Benefits
FDIC insurance isn’t the only reason to seek out more traditional financial services. Money stored on a card or as cash in a safe isn’t accruing any sort of interest like customers may get with a high-yield savings account. Even if not invested, storing money in a more traditional account is not only safer but can actually generate a small return while doing nothing.
4. Likely to Keep Consumers Unbanked
Due to their convenience, it’s easy for consumers to get stuck in a cycle of using these alternative financial services. Besides the high fees associated with them, there are other downsides to not being properly banked. In addition, some cash-checking stores also offer more nefarious services like payday loans or other predatory products to customers.
What Are My Other Options?
Banks have begun to address consumers’ distaste for the high and/or surprising fees levied by traditional banks.
Some of our favorite banks don’t have physical branches, but you can easily access your funds from the no-charge “cash back” feature used by most retail outlets including convenience and grocery stores. You can also access cash through bank ATMs and many times there are ZERO ATM fees! If you need to deposit a physical check, all you have to do is take a picture of the check from your smartphone using the app created by the bank.
One of our favorite features of all of these banks is that they do not charge overdraft fees. Why? Because if you don’t have funds in your account, they won’t accept the charge. Most CheckingExpert.com visitors agree that they would rather have a charge denied than face a $35 overdraft fee from a traditional bank. We couldn’t agree more!
Here are our favorite alternatives to cash-checking stores you can take advantage of regardless of your financial history.
Check-cashing stores fill a need in the marketplace for those who either do not have access to traditional banking or are sick and tired of getting bamboozled with outrageous fees. The downside? There is also a high cost to utilizing check-cashing services.
Finally, there are some banks that are listening to consumers and do not charge fees or demand account minimums. These banks offer strong options to those who have used expensive and risky check-cashing stores in the past.