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Unlike banks, which generally observe regular business hours, most CCOs stay open late (some are open 24 hours), six or seven days a week. Also, many banks place a hold on a check (especially if it is written for a greater amount than the balance in the depositor’s checking account) so that the depositor cannot access the funds until the check has cleared (been determined to be valid), which often takes a number of days. By contrast, a check-cashing store offers the check holder instant cash. Millions of Americans experience cash-flow shortages (meaning that the money from one paycheck barely lasts until, or even runs out before, the next paycheck is received). For these people the benefit of getting instant cash seems to outweigh the fee associated with the convenience. Indeed, according to Financial Service Centers of America (FiSCA), an industry trade group that represents CCOs and payday lenders, 30 million people cash 180 million checks at CCOs in the United States every year.
Check-cashing stores calculate the fee for cashing a check as a percentage of the amount of the check. The maximum percentages vary from state to state according to state laws, but it is usually between 2 and 3 percent for a payroll or government check. For example, if you cash a $500 paycheck at a check-cashing store that charges 2.5 percent, the fee will be $. Fees for cashing personal checks are much higher and can even exceed 15 percent, because there is a greater chance that the check will not clear. While these fees might seem trivial compared to the benefit of gaining instant access to your funds, they add up: FiSCA has estimated annual check-cashing revenues in the United States to be more than $1.6 billion. Further, studies have suggested that the average unbanked American spends approximately 10 percent of his or her annual income on check cashing and other “fringe-banking” services.
The most significant secondary service offered by CCOs is payday loans. Alongside check cashing, payday loans became a booming business in the 1990s. For people who hold checking accounts, payday loans are intended to cover unexpected expenses and general cash-flow shortages and to help avoid bounced checks and overdraft charges. (When someone’s bank account does not have enough funds to cover a check they have written, that check is said to “bounce” when the receiver tries to cash it.) A customer takes out a payday loan by writing the lender a postdated check (postdating means labeling it with a future date when it can be cashed) for a certain amount of money. The term of the loan is usually one to two weeks, according to when the borrower expects to receive his or https://onedayloan.net/payday-loans-ky/ her next paycheck. The fee for taking out the loan is usually between $15 and $30 for every $100 borrowed. Even though this fee amounts to a very high annual interest rate (anywhere between 300 and 900 percent), many people are willing to pay it in exchange for fast access to needed cash.
The ability to offer a wide range of services became critical for CCOs in the mid-1990s, when the rapid growth of electronic banking (particularly direct deposit) presented a major challenge to the industry. Direct deposit is a system that enables employers and government agencies to send payments electronically to an employee or recipient’s bank account. The funds transfer immediately, so there is no need for the bank to impose a hold on the payment, and there is no associated fee. The rise of paperless transactions threatened to take a major bite out of CCOs’ main business, processing paper checks. It was in large part the advent of direct deposit that led many CCOs to expand their services to include sales of lottery tickets, bus passes, phone cards, and postage stamps. CCOs also responded by finding ways to participate in the direct-deposit process. For example, they partnered with banks to receive the deposits of a segment of customers (especially those without bank accounts) and charged those customers a flat monthly fee (usually under $10) to withdraw their funds.