What It Means
Check-cashing organizations (CCOs), commonly known as check-cashing stores, are business outlets that cash checks for a fee. They cash a variety of checks, including payroll checks, personal checks, government checks (such as Social Security checks), income-tax refunds, insurance checks, money orders, and cashier’s checks (the latter two are different kinds of prepaid vouchers that can be purchased in order to make a payment to a third party; both are commonly used in lieu of personal checks). Many check-cashing stores also offer various secondary services, including payday loans (small, short-term loans that are intended to be repaid on the borrower’s next payday), money transfers, and bill paying (wherein a customer can pay his or her utility bill and other bills through the CCO). Some outlets also sell money orders, lottery tickets, bus passes, fax-transmission services, prepaid phone cards, and postage stamps.
In the United States the clientele at check-cashing stores are predominantly low-income and working-poor individuals, many of whom belong to minority ethnic groups. Most do not have accounts with traditional financial institutions such as banks. People who are either unwilling or unable to do business with banks are often described as “unbanked.” In 2006 the Federal Reserve Board (a committee that oversees the Federal Reserve, the central banking system of the United States) estimated that nearly 13 percent of U.S. families did not hold a checking account. Substantial research has been conducted to understand why payday loans in Utah this population tends to avoid traditional financial institutions. Although there is still debate on the subject, some reasons include: a basic distrust of banks, the perception that bank fees are too high, and the failure of banks to provide financial services that cater to the needs of low-income people.
In the United States in 2006 there were approximately 13,000 check-cashing locations, which cashed more than $80 billion worth of checks per year. CCOs may be small, independently owned businesses or large regional or national chains. The most prominent CCOs in the United States are ACE Cash Express, Cash America International, and EZCorp.
CCOs have also been the subject of intense public and government scrutiny: while some people claim that check-cashing stores provide much-needed financial services to a segment of the population that is not adequately served elsewhere, others contend that the industry unfairly exploits the country’s most financially vulnerable population by charging exorbitant fees.
When Did It Begin
Commercial check cashing emerged in the United States in the early 1930s as a niche business for processing payroll and public-assistance (government-aid) checks. In the aftermath of the sweeping bank failures of the late 1920s and early 1930s, many Americans were reluctant to deposit checks into banks, preferring instead to cash their checks at neighborhood bars and stores that charged a small fee for the service. With the establishment in 1934 of the FDIC (Federal Deposit Insurance Corporation, which guarantees individual bank deposits against bank failure), public confidence in banks was largely regained, and growth of the check-cashing industry remained modest for decades.
The industry received a major boost in 1980 with advent of bank deregulation. By lifting certain government restrictions on how banks, savings banks, and credit unions (member-owned financial institutions) could operate, deregulation led to increased competition between the various kinds of mainstream financial institutions. In the scramble for profit that ensued, many traditional banking facilities closed less-profitable branches in poor urban neighborhoods, introduced fees for check cashing and penalties for accounts that dipped below a certain balance, and stopped providing the types of services (such as small, short-term loans) that low-income households need.