What Is Check Cashing?

Check-cashing services allow people without bank accounts to cash checks. A fee is charged, sometimes just $1, sometimes more than $100, so that people who need cash, get it.

The service primarily is aimed to the unbanked or underbanked, but can be used by anyone who needs cash right away.

The Unbanked Population Is the Most Affected

Unbanked means an individual does not have a bank account in any form. Underbanked means an individual has an account of some kind, but still uses alternative services, such as a check cashing service. The Federal Reserve reports that 6% of the U.S. population does not have a bank account at all. The percentage may seem low, but 6% of the U.S. adult population is 15.6 million people.

Why would a person be unbanked? They may not be able to open a bank account due to unpaid past fees or a history of overdrafts, or simply might not want an account. Their area of residence may be rural, with few in-person banking opportunities.

The underbanked might want to use the service to more easily cash their checks, or to fill a fast need to get cash.

It probably isn’t surprising that most unbanked and underbanked are low income. Almost one-fourth of those who did not finish high school and 21% of those whose annual income is less than $25,000, are underbanked.

A check cashing service can be helpful, especially to the 15 million people who are unbanked. However, anyone considering the service should know the fees that are charged. It can be expensive.

What Is a Check Cashing Service?

A check cashing service is what it says – it allows a person who does not use a bank to cash their checks.

It’s important to remember that these services are not banks. Instead they are “storefronts” or businesses like Amscot, ACE Cash Express and Check City that offer several simple transactions like check cashing, money orders, payday loans or bill payments for a fee.

They also can be major retailers like Walmart, Kmart, Publix, Kroger, and Food Lion.

They are prevalent and provide help to those who need a way to cash a paycheck or other check – such as an IRS refund or Social Security check.

The Financial Service Centers of America (FISCA), which represents this industry, reports that there are more than 13,000 check cashing “stores” nationwide. They serve more than 30 million customers annually, and cash more than $58 billion in checks.

In total, they provide an estimated $106 billion in financial services each year.

How Does Check Cashing Work?

The system is not difficult. Merely take your check and identification card to a check cashing location, sign the back of the check and you can turn the check into cash. You will take home the value of the check, minus the fee. Some stores may require you to fill out a form.

One of the main differences between using a bank and a check cashing service is that a person can put the cash in their pocket immediately.

Some banks have a three-day hold on checks that are deposited into accounts. That means if you deposit a check on Monday, you may not be able to access the funds until Thursday of that week. If there is an immediate need for the funds, the check cashing service will turn the check into cash, which you can carry out of the office.

Who might need this kind of service?

• Unbanked and underbanked individuals: Some people do not like using banks. Others have a troubled history of overdrafts or not paying their fees and banks won’t provide them with an account. For these individuals, a check cashing service isn’t a nice thing, it’s a necessity.
• People who need cash immediately: The Federal Reserve reports that 13% of the country that has a bank account still uses check cashing services. FISCO says 60% of customers have a bank or credit union account. These people are attracted to the convenience of check cashing services and ability to get cash immediately. Some people might not be able to wait the few days it takes a check to clear at the bank If, for example, the mortgage or electric bill is due.
• People who do not have traditional financial services in their area: Rural or low income areas may not have a plethora of banks. Yes, online banking is available, but the low income or rural communities might not have access to a computer or the internet. Also, some people need the ability to cash a check at odd hours, which can be done at many check cashing stores set up in underbanked or unbanked communities.

Pros and Cons of Check Cashing Services

Everything in life has give and take. So it is with check cashing services. The decision to use a check cashing service depends on circumstance and financial status. While there are fees, the ability to gain faster access to your money can be important.

There are positives and negatives to this approach. It’s wise to understand both.

Pros

Some of the positives of a check cashing service include:

• Access to financial services for the unbanked and underbanked, those who might otherwise have no place to turn.
• Immediate access to cash without waiting for checks to clear.
• The service may be open later in the day, providing more opportunity to cash a check.
• The service also may have offices in locales without brick-and-mortar banks.

Cons

Chief among the negatives are the fees that check cashing services charge, fees which continue a difficult cycle for low-income users who are seeing some of the little money they earn, go to a service just to cash a check. Among the negatives:

• Fees: The fees for cash checking services range from a low of $1 in some places to a high of 2% of the check amount in other places. These fees chip away at the ability to pay bills or have disposable income. Always understand the fees and costs before using check cashing.
• Upselling: Many “services” will try to sell high-interest payday loans to customers. The idea of accepting a payday loan should set off a red alert to all consumers because of its predatory nature. It’s a dangerous and costly way to borrow money. You might let ‘em cash your check, but don’t let ‘em talk you into a payday loan.
• Risk: It may seem like a good idea to cash a check but walking out of a business with $1,000 in your pocket does bring risk, especially with ne’er-do-wells aware that those leaving the particular business will have a chunk of cash.
• No federal protection: There is no FDIC protection for your money at a check cashing service the way there is at a bank. Anyone who opens an account at a bank is insured for up to $250,000 per bank for each account ownership category. Which means if the bank fails, the government covers your loss up to $250,000. Check cashing stores are one-stop shopping, with no continuing protection.
• Getting trapped: The ease of check cashing can lead to a difficult cycle. Cash a check, take your money, pay the fee. This may seem convenient, but the cycle won’t help those struggling to pay the bills. The result is a person does not go to a bank and does not develop a relationship with the local bank or credit union. It’s always best to use a bank or credit union. Sometimes things that seem easy, simply come at too high a cost.

Though there are positives to check cashing stores, the negatives are real and could be significant.

Alternatives to Check-Cashing Services

The underbanked who do not take advantage of what a bank offers are costing themselves unnecessary fees and turning away from the benefits of the local bank. Developing and maintaining a relationship with the local bank provides many benefits, including their willingness to help because they know you.

Using a check cashing service once or twice when the need arises may not be a major issue, but the more the service is used, and the more the dependency on the quick fix grows, the more fees are paid and the less beneficial the service.

The average fee for check cashing services varies by state, but typically it can be between 1% and 12% of the value of a check. For a $1,000 check, that’s a range of $10 to $120 simply to cash a check. Giving away $120 for convenience is not financially sound in the long term.

The Consumer Federation of America reports the average nationwide percentage to cash a check at a service is 4.1% and it varies by state. In Kentucky it could cost $50 to cash a $1,000 check. In New York it might cost $16. Elsewhere it might cost $120.

What are the alternatives to check cashing?

• Use a bank where you don’t have an account: Some banks have this policy. It may cost, but the cost could be $3 to $5, less than the least expensive check cashing service. While there to ask about cashing the check, inquire into whether the bank has an account or service that fits your needs. If you have an account at a bank, cashing a check typically is free.
• Second-chance checking account: Some banks offer what is called a second-chance account. This allows those who have had problems with banks in the past another opportunity to set their financial ship in the right direction. These accounts typically are checking accounts with different fees and rules. In essence, you will be “on probation” until you show you can manage the account properly. Doing so will lead to financial stability and the ability to use your local bank and avoid check cashing services. The second chance option is not available at all banks.
• Mobile/online check deposit: The easiest workaround for the underbanked is to use your phone to deposit a check. The interface is simple and easy, and it allows a consumer to make the deposit at any time, day, or night.
• Direct deposit: The simplest way to deposit a paycheck. Sign up at your workplace, and your pay will automatically be deposited into the account of your choice. Again, this avoids the need to visit a check cashing service at odd hours and avoids the fees.

What if I Don’t Have a Bank Account?

Though check cashing services can provide a solution to those in need, there are alternatives that would help avoid costly and excessive fees. Those who use the service typically are lower-income, which means they could be spending 5%-to-10% of their paycheck in fees. For them, several hundred dollars for fees instead of groceries, makes a difference.

What other options might be available?

• Cash the check at the bank that issued the check: A handy solution provided that the bank is close.
• Deposit the check at an ATM onto a prepaid card: To do this, obtain a prepaid ATM card from a bank. Then take the check into the branch, where bank officials will ask you to sign the check, provide an ID and state the card account you wish to use. Your paycheck goes directly to the ATM card, which you can use almost anywhere.
• Cash the check at retailers and grocery stores: Walmart allows check cashing in stores. Charges are $4 for a check valued less than $1,000, and $8 for checks over $1,000. Walmart’s fee is 0.4% – far less than the nationwide average at check cashing stores.

The Bottom Line

Check cashing services can and do provide services to millions of people, but it’s best not to rely on them for the long term.

On a one-time basis when the need is high, using the service can be beneficial. But the high fees add up and lead to a debt spiral that is hard to break. That situation can be harmful to anyone’s financial picture.

Those who do face that kind of debt problem would do well to talk to a nonprofit credit counselor, who could assess your budget, income and expenses and offer advice on how to avoid debt. Credit counseling could include a budget review and debt analysis, and lead to remedies that include a debt management program.