Overview of Check Cashing Industry

Transcription

1 Overview of Check Cashing Industry

2 Introduction USA Check System commissioned this report in February 2005 to provide its executive management team and customers with an overview of the U.S. check cashing industry and competitive landscape. It will be the objective of this report to provide a high-level review of the neighborhood financial services market that competes for the business of the check cashing customer that has traditionally been known as the unbanked. As the market has transitioned and grown over the years, this segment of the market is now better described as being the self-banked. This report will provide some background as to the growth drivers in the business and why those drivers are fueling significant expansion in the U.S. The report will outline who the players are in the retail segment of the market, the Check Cashing Organizations (CCO s) and will provide valuable information profiling the actual check cashing customer and the reasons behind their decisions to use CCO s. This report was compiled using extensive research of vendor web sites, check cashing store web sites and 10K annual reports (for those publicly held companies) as well as selected telephone interviews. Also, the industry trade association s web sites (and literature) were studied to reveal the facts and trends for the check cashing industry. It is evident that this industry has had an image identity crisis in the past and as of recently, has gone to extensive lengths to enhance its image to the outside world. This market, assuming all controls are in place, can be very lucrative. The profit potential has made new store openings and new market introductions expand to a level that has garnered the attention of owners, investors and the self-banked alike. This report does not attempt to make any strategic recommendations as to how a bank should position itself into the market. However, there should be plenty of information gleamed from this report that will help the executive management team lay out a path into the untapped and profitable segments of this fast growing market. An Overview of the Check Cashing Market The Check Cashing Customer The essence of commerce is that someone has a good or service to sell to someone else who has an equal or greater need or desire to buy it. The check cashing industry is the epitome of the need being filled by the product or service. It is now estimated that up to 40 million residents of the U.S (or 22.2 million households) do not have checking accounts, hence the term unbanked (Source: ACE Cash Express 2004 Annual Report). Yet these people still have to pay their bills just like those with bank accounts. There are also up to 20 million more people who are considered underbanked, which means they may have a bank account, but do not necessarily use traditional bank checking account to receive and disburse their monthly income.

3 In short, this market is huge and the demand is exploding. As traditional banks have focused on the middle and high-end tier of the consumer market, the lower end of the market has been left wide open to be served by alternative sources such as check cashing companies, payday loan stores and pawn shops. However, the market has shifted and expanded into non-traditional demographics, services and locations. This will be discussed in detail later in this report. It is safe to say this is great news for those wishing to exploit the market dynamics, challenges and opportunities that exist today. The check cashing industry s national trade association, Financial Service Centers of America (FiSCA), estimates that thirty million consumers cashed 180 million payroll checks in There is obviously a need for these services. The primary reasons people give for using check-cashing services are privacy and convenience. Since 80% to 90% of the checks presented for cashing are payroll checks, most of these customers are employed. However, many live from pay period to pay period and because every penny is precious to them, they consciously seek out the financial services they need. Although the terms and conditions may be perceived to be more expensive than maintaining a bank checking account, business is transacted in the customer s time frame and within their comfort level. Some people just like cash and it is much easier to account for it if they can touch it and feel it. According to surveys cited by the Comptroller for the Currency, the principal reason people give for not having a bank account is that it costs too much for their needs. Most banks do not cash checks for non-customers. Even with a bank account, a depositor must have a sufficient balance to cover all or most of the check or the bank will not cash the check until it has cleared. If a customer wants his/her money immediately, they must go to a CCO. More importantly, many check cashing customers are uncomfortable with banks or credit unions. They may feel self-conscious about their financial resources, their language skills or their documentation. They may also fear rejection and feel their bank records will compromise their privacy. With all that said, it is still estimated that two thirds of check cashing customers have bank accounts with minimal balances and according to a survey taken in 2000 (Source: Community Financial Services association), roughly half said they would use a savings product if it were available from a CCO. The typical check cashing customer demographics have been described as follows: Individuals between 18 and 44 Majority rent homes Are employed Annual income between $10,000 and $35,000, median $22,500 Workers or independent contractors who receive payment on irregular basis and generally in form of a check They find check cashing stores more convenient for immediate cash The self-banked consumer market has proven to be large and growing. They are still

4 looking for value while balancing privacy and convenience. They tend to be very loyal to those vendors who treat them with respect and offer other convenient services. Selfbanked consumers are a very profitable segment of the consumer pie that business people and banks alike are starting to acknowledge. Check Cashing Organizations (CCO s) Neighborhood financial services are delivered in the following retail forms: Check cashing stores Stores that offer check cashing services Payday loan stores Pawn shops For the purposes of this report, we will concentrate on the check cashing segment. However, the number of Payday Loan stores between 2000 and 2003 doubled to 22,000 stores nationwide, transacting $40 billion in According to the pawn industry s leading vendor, CashAmerica (Source: CashAmerica 2004 Annual Report) estimates that there are 15,000 pawnshops in the U.S. These numbers are noted to show the breadth and high number of stores serving the unbanked or self-banked segment of the U.S. market. According to the ACE Express 2004 Annual Report, they estimate that there are over 11,000 check cashing stores nationally. Other sources estimate that total to be up to 16,000 stores. ACE Express also estimates that six check cashing companies operate or franchise more than 100 stores while five companies operate or franchise between locations. Yet, despite these statistics, the market is still considered highly fragmented. Other industry sources estimate only one in seven check cashing stores in the U.S. have more than 100 locations and therefore control fewer than 22% of the market. It is also estimated that two-thirds of the check cashing outlets in the country are independently owned and operated. According to the industry trade organization, the Financial Service Centers of America (formerly the National Check Cashers Association) estimates the industry processes 180 million checks annually with a face value of $60 billion, which generates $1.5 billion in fee revenue. In 2004 (Source: Dollar Financial 2004 Annual Report), Dollar Financial s statistics break out to the following: Average check amount was $ Average fee/check was $13.93 Average fee as % of check was 3.70% Net write-off in their check cashing business was.2% Appendix A (Self-Banked Market Analysis Chart) breaks down the largest companies in the check cashing business. The biggest players are ACE Cash Express (1,327 stores) and Dollar Financial Corp. (1,106 stores). The next closest player comes in with a number of stores documented at 150, United Financial Services Group. Both ACE and Dollar are

5 publicly held companies, and therefore information on them is readily available. ACE forecasts a twelve-month cash requirement for each new check cashing store to range from $150,000 to $200,000. This includes facility, start-up and first year s negative cash flow until profitability. It is expected that independent operator s require much less capital and cash to get a store started and profitable. The chart also details each company, their headquarters location, website, primary focus, number of stores, number of states, products/services offered, method of delivery (company owned, franchising, partners, etc.) along with any comments related to revenue and information worth noting. It is important to note that only six companies listed in this chart are focused primarily in check cashing, three are focused on pawn loans and five concentrate on payday loans. These fourteen companies are highlighted as the players worthy of noting for the purposes of reflecting their industry presence and success. You will see from the chart that many companies offer numerous products and services over and above their core competency or focus. Those services are noted accordingly to show that many companies strive to cross-sell other products and services to a clientele that wishes to do as much of their business from a single location as possible. In other words, once a customer cashes their check, they can also buy four to five money orders in which to pay their electricity or telephone bills and they can transfer money to relatives in other countries, etc. For the sake of this report, the services listed are as follows: CC - Check Cashing MO - Money Order MT- Money Transfer BP - Bill Payment LT - Lottery Tickets DD - Direct Deposit AT -ATM PD - Payday Loans FC - Foreign Currency Exchange DC - Debit Cards PP Prepaid Phone The Regulations The growth of the check cashing industry was stimulated in part by the passage of the Bank Deregulation Act of 1980, which removed deposit rate ceilings and led to explicit pricing for bank deposit services. In thirty-two states, Check Cashers are regulated, normally by State Banking Departments or the Depart of Financial Institutions. As of the end of the year 2001, all Check Cashers and Money Service Businesses (MSBs) had to register with the U.S Department of the Treasury and to comply with the Bank Secrecy Act and U.S. Patriot Act. Compliance includes maintenance of specific records, periodic examinations, Title 31 Audits by the IRS and Currency Transaction and Suspicious

6 Activity Reporting. Since the tragic events of September 11, 2001 the U.S. government has mandated regulatory statutes in the financial services arena. This has added an extra layer of compliance and accountability that check cashers had not faced before. Therefore, new systems and processes were needed to handle additional volume and mandatory reporting and compliance issues. This has caused the check cashing stores and service providers to buy and implement computer systems that would meet the needs of the market and regulators. Summary This report attempts to paint in broad strokes the size and potential of the check cashing market in the U.S. The size of this market and its sheer organic growth potential give an optimistic outlook for banks and financial institutions seeking to enter this market. One example of a bank that decided to penetrate this market is Union Bank of California. In 1993, Union Bank opened the first of its 12 inner city Cash & Save locations, a retail brand that combines banking products and the services that check cashers offer into a single business solution. By 2001, Union Bank found that 40% of the regular repeat check-cashing clients had become banking clients with regular banking products. Richard Hartnack, Vice Chairman stated: We've gained 110,000 clients in our Cash & Save business and to put that in perspective that is about 10% of the total number of clients we've got.