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Could a check cashing / short term loan operation be operated in a more ethical fashion?
November 12, 2012 3:56 PM   Subscribe

Could a check cashing / short term loan operation be operated in a more ethical fashion, while still making (what I consider to be) reasonable profits?

I'm thinking this might be an impossible question to answer in totality on Ask Metafilter for lack of public knowledge of the industry (I'm assuming it is secretive), so let me break it down like this, and see if components of what I'm wondering can be answered:

1) How much does it cost to open a check cashing operation that isn't part of a franchise?

2) What are the typical operating margins of a business like this?

3) Is there any public evidence that the profits are exorbitant and fees could be much lower?

Finally, to tie it all together, my theory is that a check cashing operation that charged merely bad credit credit card interest would still be profitable, even with loans going bad, storefront operating fees, labor, etc.

So on a $100 loan, the fee would be $1.56 at 30% APR (assuming I'm doing the math right.)

Obviously, the store would make additional money on (reasonable) late fees, check cashing fees, selling money orders, possibly other products a low income community would find interesting, all at reasonable rates.

I believe doing this would drive out all local competition. I believe some of societal ills could be solved by more ethical business, and I hate, hate, hate check cashing places and car title loan operations, etc. It seems like regulation doesn't work to drive them away, as Ohio passed laws against them, so I'm wondering if competition could do the job. Point out what I'm missing? I'm sure there's lots, but this is something I'm seriously considering.
posted by imabanana to Work & Money (12 answers total) 6 users marked this as a favorite
 
I think your theory is, unfortunately, broken from the start. Assume you have customers that actually pay off and meet the conditions of a two-week loan, and that it takes only 15 minutes to initiate and close out a loan, and that your clerk is paid minimum wage: you're in the hole by about 40 cents.

Why not think about this as a charity/nonprofit? It doesn't change the above math, but it at least removes the need for profit.
posted by scolbath at 4:10 PM on November 12, 2012 [1 favorite]


Maybe... although I would say that your assumptions are flawed.

Credit cards can make money on the interest because (a) the credit card charges the merchant money, which is why you can get cash back even if you never pay interest (b) people who ARE carrying interest are usually carrying more than $100 and (c) the actual cost per loan is much lower because it is longer term (most people borrow from credit card for more than 2 weeks) and no store front or clerk is needed.

Compared to check cashing franchises, credit cards are essentially buying debt in bulk and therefore don't need to charge as much (and again, they also charge merchants). If you do cash advance, there is a minimum finance charge no matter how little you borrow.

Check cashing is risky because the check may not be cleared. (See all the Nigerian 419 scams.) So they are "lending" money. I imagine a lot more people try to commit check fraud with check cashing places than with regular banks (where you'd have a huge paper trail) though that might not be the case. Similarly, loans are probably defaulted a lot more...

But at the end of the day, they ARE preying on the poor and their lack of knowledge about banking. There was an NPR news piece about it a while back (linked to from AskMeFi) but I don't have the link handy.
posted by ethidda at 4:11 PM on November 12, 2012


I say this from experience (I didn't work there, but had reason to be around one): consider that once you get going, you will need to pay someone to basically make reminder phone calls all day long.
posted by gjc at 4:19 PM on November 12, 2012


You might want to do some research into micro-lending.

The difficulties in guaranteeing repayment in third world countries are very similar to what you're proposing. But one big difference is the social network. Micro-lending works because it relies on community support to guarantee repayment. They usually require many small-term loans before offering anything substantive, and you remain a part of the lending network both before and after you hit that need for cash.

They can do this when the person is solvent, because other banking options simply don't exist for those poor enough to utilize micro-lending.

The check-cashing business necessarily lacks that social network and coercion. They're the lender of last resort, and they cater to those who are on the edge of our community. They do not have a relationship with most of their customers. That means that a lot of their debt is going to be unpaid.

If you make the company large enough, that risk is diffuse enough you could probably lower rates. But then you have other interests who want a decent return for taking on that risk.

To fill in those gaps, you might want to pursue a more civic-minded credit union. But these all vary so much, that I can't say they *don't* exist. But you would still have the problem of being insular, and not well-situated to help those of the fringe. At least not without being outright charitable.
posted by politikitty at 4:45 PM on November 12, 2012


When I worked for a credit union in Oregon, several credit unions had a program where they offered payday-style loans (small, low bar for qualifying) with more reasonable rates. They'd stopped by a couple years later - none of them could find a market for small loans with actual credit checks but lower interest (ca. 17%). Another issue was probably that they were only open banker's hours.

People aren't getting filthy rich off payday loans - they're very risky debt. You can't legislate them away because it's a service a lot of people need.

This is an article by someone who worked for a check casher, you might find it informative about how the businesses work.
posted by momus_window at 4:51 PM on November 12, 2012 [1 favorite]


A friend works for a company that uses extra information from non-traditional data sources to help them assess risk better and generally provide lower-cost payday loans to people with bad or no credit. It's not a non-profit, but it's another approach to reducing the predatoriness of the industry. They do this via "Zestfinance" (underwriting with data analysis for other lenders) and "SpotLoan" (direct lending). Here's an article about them, and another one with more critical commentary.

Another company of this type is BillFloat - here's an article about both BillFloat and ZestCash (SpotLoan/Zestfinance's former name).

The FDIC did a Small-Dollar Loan Pilot Program, creating a "Safe, Affordable and Feasible Template for Small-Dollar Loans" to try to encourage banks to offer ethical payday loans.
posted by dreamyshade at 4:51 PM on November 12, 2012 [2 favorites]


Also, when I worked for Safeway, we cashed checks for a very small price. (This was at a location that also had a Western Union, so it's possibly not available at all Safeways.) But they had limits on what kind of checks could be cashed, IIRC.
posted by ethidda at 4:55 PM on November 12, 2012


You might be interested in some of the academic and community organizing done around this industry.

For example, HARD CHOICES: FINANCIAL EXCLUSION, FRINGE BANKS, AND POVERTY IN URBAN CANADA. http://www.utppublishing.com/Hard-Choices-Financial-Exclusion-Fringe-Banks-and-Poverty-in-Urban-Canada.html

Or this article from the United Church Observer
posted by Heart_on_Sleeve at 5:31 PM on November 12, 2012


This is exactly what a startup here in the Bay Area is trying to do. LendUp website.

Press coverage.

posted by amaire at 5:50 PM on November 12, 2012


The short answer is yes, it is absolutely more profitable--and predatory--than it has to be. Interest rates can functionally be as high as 300 and 400%. Lots of setups like this take advantage of people's need, lack of better options and lack of information.

You should check out the Center for Responsible Lending's website--lots of great research about payday lending and other lending issues. (Disclaimer: I'm somewhat associated with them, but I think they do great work.)
posted by aka burlap at 7:12 PM on November 12, 2012


Isn't a reputable check cashing business ultimately a bank? There are plenty of banks.

Either that or it's domestic microlending. Which I think exists to an extent in poor communities in the US, as a nonprofit.
posted by Sara C. at 8:36 PM on November 12, 2012


1) How much does it cost to open a check cashing operation that isn't part of a franchise?

The money you lend, plus the normal costs of setting up a shop. I know someone who got angel investment and set up a chain from scratch when he was in his twenties. Increasingly, activity is moving online, which serves to cut long term costs of operation.

2) What are the typical operating margins of a business like this?

They're high, but I suspect they are also on the wane, due to the need for high marketing outlay and lots of competition. Because it is not a hard business to get into.

3) Is there any public evidence that the profits are exorbitant and fees could be much lower?

No idea, but the guy I know who set up his business did so after having worked in an investment bank and having done due diligence on a payday lender. His finding was that default rates for payday loans were low, while the cost to him of borrowing was also low. So (low borrowing cost + high interest) - low default rates = high margin. Once you understand how inexpensive it is to cover the risk of default, you appreciate how high the margins can get (he expanded to 100+ stores in 7 years).

The reason the interest rates are high is because the business is high volume, low value transactions with a bunch of fixed costs. One could charge a transaction fee and lower interest. Or no fee and higher interest. That is one place to tweak but ultimately, for an ethical provider or not, there is a non-trivial cost of running any high volume/low value business that includes some risk - be it a payday lender or a corner shop.

The success of the business model is that the borrower is very heavily incentivised by punitive interest rates to pay the loan back quickly, thereby freeing up cash to be lent again and also reducing the rate of defaults. In theory, one place to tweak would be to soften interest rates dramatically after the first week to bring it in line with a normal loan. But you, the lender, probably incur two costs: the cost of not knowing when you are going to get your money back and the cost of higher defaulting (which I think would be inevitable once you remove some of the incentive to pay back quickly).

Which brings us onto lending generally: poor people get shitty financial advice. They get shitty rates for loans and shitty rates for bank accounts. They also get penalised for having variable or inconsistent income. Payday lending is just a part of that picture. There absolutely is a space in the banking sector for a bank that caters to those specific needs and doesn't penalise poor people for variable and inconsistent income - either from a saving or borrowing perspective. What the data from payday lending tells us is that default rates are not high - around 6%. I suspect those defaults could be managed down even lower with more sensible banking practices and financial advice.
posted by MuffinMan at 2:12 AM on November 13, 2012 [1 favorite]


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