What Are Check-Cashing Services? How Do They Work?

It’s always worth it to get paid, but where can you turn this celebration into real money? For about 6% of American adults, the answer is no bank or credit union. This small group of people is often referred to as the unbanked, meaning they do not have traditional checking or savings accounts. Instead, they must find other ways to cash the check and turn the paper amount into actual dollars.

What is a check cashing service?

While you may not be familiar with check cashing services, you’ve probably come across one of these places that will be happy to fulfill your checking needs. They usually have signs announcing their check-cashing ability, as well as payday loans, wire transfers, money orders, and other financial transactions. There are more than 13,000 locations nationwide, according to the Financial Services Centers of America (FISCA) trade association, which represents many of these locations. Lots of people put a lot of money through them too. They serve more than 30 million customers and clear more than $58 billion in checks annually, according to FISCA data.

How does the check cashing service work?

If you have a paycheck or a government check, such as if you send a social security check, for example, a check cashing service will verify your identity, cash your check, and give you the money immediately, minus a processing fee. Instead of depositing the check into a bank or credit union account, you immediately walk out of the check-cashing shop with cash. Some services also offer prepaid cards.
When you deposit a check at your bank, it may take several business days for the check to clear. Checking balance availability depends on the deposit method. When you find yourself in financial trouble, you may want to withdraw your money faster. Check cashing services provide instant, same-day cashing without waiting for the banking system to approve checks.
Remember that check cashing services charge fees to process checks, and these fees must be disclosed up front. Fees vary by company, state, check type and check amount. For example, Amscot, a Florida-based financial services company, charges 2.9% for cashing government checks over $1,500, 2% for locally computer-generated paychecks over $1,000, and 4.5% for paychecks and handwritten checks A fee of 9.9% is charged on personal checks and cash orders.

It’s important to understand the fees before using a check cashing service. For example, if a check-cashing service charges 2% to cash your $1,500 salary, that equates to $30 and your take-home pay is $1,470. If you cash 26 paychecks a year, the total cost is $780. You can save on these costs by opening a checking account and depositing your paycheck there.
As a non-bank financial service provider, check cashing services are often useful to the following categories of customers:

  • People without bank accounts. Check cashing services may be an alternative financial service if you choose not to open a bank account or if you have a negative history on file with ChexSystems that prevents you from opening a bank account.
  • Someone who needs cash immediately. Not everyone who uses a check cashing service doesn’t have a bank account. According to FiSCA, 60% of their customers have a bank or credit union account but choose a check cashing service for convenience, flexibility, or other reasons.
  • People who need convenient financial services. Some live in communities without physical bank branches, while others need the convenience of cashing checks outside normal banking hours. Many check cashing services are located in unbanked communities and stay open late. Some are open 24 hours a day.

Pros and Cons of Check Cashing Services

Michael Sullivan, a personal financial advisor with Take Charge America, says the biggest downside to check-cashing services is cost.
“Some outlets charge 10 percent or more of the value of certain checks to clear them,” Sullivan said. “If consumers were paying 10 per cent of their net income to get paid, it could lead to a significant drop in their standard of living.”
Sullivan also pointed out that while you might be in a place just to cash a check, you could be tricked into signing up for more services. “Where the law allows, many cash transactions are on credit, which is more tempting for cash-strapped consumers,” he said.

Despite these drawbacks, the reality is that many people have to use them because they cannot open a bank account.
“The beauty of the check-cashing business is that they provide a work-and-life mechanism for many consumers,” Sullivan said. “From financial crime records to undocumented status, consumers may not have access to a bank account for any number of reasons. Whatever the reason, these individuals still routinely need to cash checks, whether to pay bills or collect tax refunds and paychecks. Some seniors must Cash Social Security checks. Without business check cashers, these consumers will have no choice.”



Instant access to money High fees that can add up
Financial resource for those who cannot be approved to open a bank account No FDIC protection for your funds
No ability to build a relationship with a financial institution
Many check-cashing outlets also advertise tempting offers for high-interest loans

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