It’s no secret that check payments are on the decline worldwide. The US has been slower than many other countries to move away from checks, but even Americans are choosing alternative payment options in today’s digital world.
The US Federal Reserve’s 2015 How We Pay survey showed people made 46 per cent of all non-cash payments via checks in 2003. By 2012, this had slumped to just 15 per cent – and four years later, the figure is likely to have diminished even further.
However, checks remain a fundamental part of the US payments system, and banks continue to examine ways of providing customers with more choice in this area. As such, an increasing number of financial institutions (FIs) are looking to enter the world of check-cashing services.
Check-cashing stores have traditionally dominated the space, enabling customers to obtain funds from a check before it clears. Specifically, these outlets are popular among the nation’s unbanked and underbanked population, who often don’t have access to regular financial services.
Driving financial inclusion
A recent Associated Press (AP) article noted how providers now see check cashing as an opportunity to appeal to fringe demographics while delivering additional revenues through fees.
Ohio-based bank Fifth Third offers tiered fees based on what type of check consumers deposit (payroll, government or personal) and how often they use the bank’s services.
Personal checks for infrequent users incur a four per cent fee, while a government check for a tier-three consumer would cost just one per cent of the sum. The service is even available through a mobile app, although the bank is yet to expand check cashing across its ATMs.
Mark Erhardt, director of retail product management at Fifth Third, told the AP that the bank had offered check cashing since 2011. However, Fifth Third quickly noticed repeat custom from people who did not have bank accounts with the company, so it introduced new services to target these users.
“It builds a relationship that places these consumers back into the banking system on their terms,” he added.
One of the key drivers behind banks offering these services is the development of technologies that enable better payment authorization and transaction routing between financial institutions.
For instance, Early Warning’s bank-to-bank good funds network, which utilizes NCR Corporation’s Authentic software, gives participating depositing FIs real-time guarantees for check and ACH transactions. Bank customers therefore benefit from quicker access to funds and instant notifications on relevant deposits.
What are the implications?
There are various benefits for banks of expanding their check-cashing services. As mentioned, they can generate fees that local stores are currently absorbing.
Meanwhile, check cashing provides an opportunity to boost financial inclusion and promote interest among consumers for a wider array of banking services.
Nevertheless, one area of concern for consumer groups is that check-cashing usage is often heavily skewed towards low-income demographics, which means more fees for already disadvantaged groups.
According to the AP, there are also fears that banks may fail to inform customers of how quickly they can receive check funds without intervention – federal laws require providers to make $400 available within 48 hours of a deposit.
Provided banks can overcome these issues and allay concerns, the check-cashing business could prove a lucrative one. While people continue to use fewer checks, the Federal Reserve revealed 18.3 billion were deposited in 2012, with a total value of $26 trillion.
Even if banks can wrestle away a fraction of these revenues from other providers, they could stand to make gains across multiple service areas and drive customer bases higher.