A Place for Non-Standard Banking Services

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Having an open mind for non-standard banking services like check cashing and payday loans has left me in a minority whenever related issues come up in Rhode Island.  Writing for The Simple Dollar, Trent Hamm provides a good explanation for joining that minority.  He cites research from University of Pennsylvania professor Lisa Servon:

The prevailing wisdom from bankers and policy makers went like this: People who used alternative financial services — like check cashers and payday lenders — were making expensive and unwise decisions. If we could just educate the ‘unbanked’ and ‘underbanked’ and usher them into the modern financial system with a bank account, their fortunes would surely improve.

‘It felt like the only way I could answer this question: If alternative financial service providers are so bad — if they’re so predatory and so sleazy and so much in the business of taking advantage of people — why are people using them in growing numbers?’ Servon said.

Hamm sums the decision as this: “check-cashing service offers all of the services of a bank that don’t require extending trust to the customer; instead, all of the transactions are done over the counter for a clear fee.”  Payday loans could fit in that category, as well.

When my family was younger and living paycheck to paycheck (barely), we would get caught in vicious cycles at our regular bank that felt pretty predatory.  If a check cleared a minute after an expense came in, we would be hit with a fee that was bigger than the margin we had for error.  Sometimes, this would cascade into multiple fees in a row before we’d even been notified of the problem.  The fact that these fees were charged on the back end rather than as a condition of making a transaction was part of the problem.

It’s interesting to think through the dynamics of these à la carte services to answer the question of fairness.  Imagine somebody in an area starts offering check cashing services.  Since such businesses are typically giving cash upfront, the owner has to assume that some percentage of checks will be bad and charge a premium to cover that risk.  If the charge is higher than the risk itself justifies, then some other company could easily undercut the business by charging less.  If no competitors emerge, then that tells us something about the value of this business doing it in an area in which nobody else will.

All of this applies as long as government doesn’t get involved, at which point, it will distort the market, either by subsidizing a competitor or suppressing competition.



  • Rhett Hardwick

    Having a tenant with a bad history, I now cash her checks rather than depositing them. Bank of America charges me $8.00 to cash a check drawn on one of their customers.

    At one of my banks, a check went bad, and I made a total of $52.00 in “overdrafts” on my ATM card. $3.00, $8.00, etc. The bank charged me $335.00 in overdraft fees. Since, Congress has passed a law that the fee should have some relevance to the amount overdrawn. Over draft fee is now something like $8.00. They are now pushing “overdraft protection”. They readily admit that they have gone into the “small loan” business. See a TV on sale at $400, but you are flat? Simple, “overdraw” we’ll “protect” you.

    • Christopher C. Reed

      Venmo. Takes a couple of days, they make their vig on the float, but it’s been solid so far…

  • ShannonEntropy

    I’m with you in the minority Mike… these joints def have a place in a capitalist society; and let the “invisible hand” of the market sort things out

    Check-cashing businesses are emblematic of the entire prablem of being poor in this country. The indigent get nickel-and-dimed to death whereas the wealthy who need it the least also often pay the least

    Fer ex, it costs ~20% more per gallon to buy home heating oil 50 gallons at a time than to buy 250 gallons or be on a oil co.’s 150-160 g / month service plan. Same with “Loosie” cigarettes i.e. buying them one at a time for a buck each for those who can’t afford a whole pack of 20 when the whole pack costs $9

    Banking too… the less money you have the more it costs you, which Hamm explains in detail. At the other end of the spectrum you got people like me. I am a member of Santander Select, a sorta private bank-within-a-bank where all the traditional services are free: checking; safe deposit box; wire transfers; certified checks; no ATM fees and even out-of-network fees are waived; not to mention higher interest rates on interest-bearing checking accts & MMAs; free Experian ID theft monitoring; overdraft protection — the latter the one service I’ve never needed; and prolly a few more I can’t remember off the top of my head [ donut bother asking how to apply; you have to be invited ]

    Inner-restingly I do occasionally find myself in a check-cashing joint. Hamm mentions “public transportation passes.” In Atlantic City they sell senior-citizen discount Jitney tickets in them [ That is the city-run 24/7/365 shuttle that runs every few minutes. The #3 & #6 lines make the rounds of all the casinos and you never have to wait more than 5 minutes for one. 75¢ for seniors vs $2.25 for all others including poor seniors who cannot afford the minimum purchase of ten ]

    There’s a great book on this whole subject, with a quite apt title; check it out:

    https://www.amazon.com/Nickel-Dimed-Not-Getting-America/dp/0312626681

    • Rhett Hardwick

      Check Cashing Services and the “invisible hand”. Let us say you are a small contractor with a recent payment of $10,000, which you prefer would not show up on your bank statement. The “Invisible Hand” directs you to the Check Cashing Service. This is a bigger part of the business than many would assume.

      • Christopher C. Reed

        When we first moved to RI years ago, we were informed that in ContractorWorld, there were two economies, the credit card/check/paper trail one, and the cash one.

        • Rhett Hardwick

          Not just here. I first heard about the check cashing services trick some years ago, in Massachusetts. “Cash is King”. Since their fees are scaled on the amount of the check, do you think they are getting rich on $350 paychecks? Contractor checks are the juice, sort of like lottery tickets in a c-store. It is well for the contractor to request a bank check.

          • ShannonEntropy

            After nearly 40 yrs living in Li’l Rhody
            I have a totally different take on contractors here

            I think most of them are money launderers

            If you need a job done & you call 10 contractors: five never even return your call; three say they’ll show up & then never do; one is some goof-ball you’d never hire; and one is a pro outfit so you just give up & end up hiring them

            What contractor is so busy they won’t even bother to answer your call to see what you want ?? Or donut ever bother to show up ??

            Obs these guys are most likely drug dealers laundering their ill-gotten gains thru a supposed “legit” business

            These guys likely *do* use banks to be able to launder & then spend their loot

            The very definition of Money Laundering is “the concealment of the origins of illegally obtained money, typically by means of transfers involving banks or legitimate businesses”

            So if you have some other explanation of why most Rhodent “contractors” won’t even answer a voice mail message, I’d be happy to entertain it

          • Rhett Hardwick

            When looking for somebody, use the Contractor’s Blue Book. Most likely only on the web these days. Most don’t really want to do business with “homeowners” but be persistent.

      • ShannonEntropy

        Let us say you are a small contractor with a recent payment of $10,000, which you prefer would not show up on your bank statement.

        The ProJo just ran a story about some LaProv jewelry manufacturer who plead guilty to evading taxes on $400K in income in *one year*

        The guy used a check cashing service to divert / launder a lot of his revenue, and declared only what he deposited in his business acct… he then filed a return with
        legit deductions we can assume

        No doubt in my mind that the Check Casher had nothing to do with how the IRS caught him. They have algorithms that compare revenue & deductions to declared gross income for every type of business. Fall outside of their parameters and they swoop in with an intense audit that begins in their civil division but goes to the criminal div if the numbers get too big

        The guy should have read what the IRS says about all this on their own web site. He just got a bit too greedy

  • BasicCaruso

    There used to be a place for that in the U.S… the Post Office. An idea supported by Republicans before they became captured by the financial industry (along with many Dems)…

    https://www.jacobinmag.com/2017/11/postal-banking-payday-lenders-usps
    “I am convinced that the people desire such banks,” President William Taft declared in 1909, since they would benefit “a great many people of small means who do not now have banking facilities.”

  • Joe Smith

    Shannon – isn’t this just a reflection of economies of scale in a competitive market should lower average cost and thus push down price.

    A bank, let’s face it, makes money on the spread between what it spends to attract funds and what it can leverage (loans, interest on excess reserves at the Fed / intra-bank loaning, or other non-loan assets) beyond its required reserve amount (hence a bank starts in the whole greater than just its fixed cost).

    But, how is that different than a casino with high rollers versus the quarter slot player? The casino needs both, but clearly caters more to the former.

    What will be troubling is the push for a cashless society – a natural grab by the monetary policy makers to give them more control over the money supply and the fiscal side as full access to transactions makes taxing transactions easier and cracking down on black market activity – setting aside the additional trouble of more government access to our behaviors.

    I fear part of the push – under the guise of “protecting consumers” – to regulating and eventually eliminating these services is to get at this cashless society. Good to see places like Philadelphia outlawing the ability to ban “cash free only” stores.

    Next thing will be the elimination of the “good for all debts public and private” on currency – will add “only if deposited in some electronic account”..

    • Rhett Hardwick

      Some years ago, I found that the Massachusetts Secretary of State’s office would not accept cash. In fact when I offered the $10.00 filing fee, the response was “Hey Joe, we’ve got another a–hole here”. I encountered an Asst. Sec. of State, and asked about it. Got in a heated debate, I asked about “all debts public and private”. I was told “That doesn’t apply to us”. I encountered the lawyer for the dept., who I knew. He was 3 months from retirement. I asked “Larry, are the employees stealing the money”. He nodded. I called the Comptroller of the Currency about “all debts, public and private”. They told me they didn’t know what that meant”. Ah, transparency!

      • ShannonEntropy

        …”all debts, public and private”

        From the US Treasury web site:

        “This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services

        • Joe Smith

          The legal technicality is *when* the debt is created. For example, a store – unless banned – can have a “no cash” policy. There is a bit of debate about whether the sign itself shields the store from a debt being created should you only have cash and you get the good or service rendered. However, take a restaurant with a no cash policy that serves you the food – then the debt has been created. Hence, those places generally require the payment ahead of the service to prevent that situation.

          You will note in the law cited that “public” is left out. You can pay the IRS in cash.

          You would win Rhett if you pushed your case I would think – I told our town manager the town should pay those nuisance settlements every fired employee files and generally gets in $1 bills.

        • Rhett Hardwick

          The language Shannon quotes is, of course, an interpretation of the statute. I am wondering if the statute has been revised lately.

    • ShannonEntropy

      ITA with most of yer points Joe except:

      Good to see places like Philadelphia outlawing the ability to ban “cash free only” stores

      Retail stores that adopt this policy usually do so cuz they get armed robbed so often

      By not letting these stores to accept payment with credit / debit only they might just close up shop… enlarging the “food / retail deserts” so many inner cities consist of these days

      Yet another example of The Law of Unintended Consequences

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