WASHINGTON — After years of watching check-cashing stores and payday lenders steal potential customers, banks and credit unions are beginning to offer the same services and products, but in more affordable and responsible ways.
The movement comes as federal bank regulators focus their attention on the estimated 73 million Americans who are underserved by the nation's banking industry.
The hope is that mainstream financial institutions can convert the check-cashing customers and payday loan-seekers of today into the sought-after depositors and low-risk borrowers of tomorrow.
"A large number of banks and financial industry players are going after this market because they do think this is a growth opportunity. They can make money on these consumers and they can do it in ways that are mutually beneficial for them and the customer," said Kimberly Gartner, associate director of the Chicago-based Center for Financial Services Innovation.
The dynamic growth of the alternative finance industry, which includes car title lenders, has proved the dire need among many Americans for convenient small-dollar loans and immediate check cashing without bank delays.
About $10 billion in fees are collected each year on these services from some 47 million households, or roughly 81 million people, said H. Leon Majors III, the president of ESP Payments Research Group in Salisbury, Md.
While the alternative finance industry provides a valuable service, it's drawn the ire of consumer advocates and lawmakers because of its high fees and sometimes predatory nature. Those who cash checks, pay bills and borrow money through these channels often have bank accounts but typically pay the higher costs for fast access to cash.
Next year, the Federal Deposit Insurance Corp. will launch a two-year study in which nearly 40 banks will offer small-dollar loans of up to $1,000 as an alternative to payday loans.
"Offering low-cost alternatives to high-cost payday loans can be done profitably," FDIC Chairman Sheila C. Bair said recently. "I would like to see reasonably priced, small-dollar loans become a staple offering among depository institutions."
To further that goal, two large California credit unions recently took the bold step of purchasing check-cashing store chains. Neither chain plans to reduce prices for check-cashing services, but both will offer new cash-advance loan programs to compete with payday lenders.
A subsidiary of the Kinecta Federal Credit Union of Manhattan Beach, Calif., recently purchased 55 Nix CheckCashing stores throughout Southern California. By next summer, all stores will provide full credit-union services along with the current menu of check-cashing services.
"To some extent, it's revolutionary," said Simone Lagomarsino, Kinecta's president and chief executive officer. "We're going to be a trendsetter here, and it's a trend that we hope picks up momentum and gets duplicated across the country."
On a smaller scale, a subsidiary of the Pasadena-based Wescom Credit Union recently purchased eight Area Check Cashing Centers, also in Southern California.
Kinecta and Wescom will offer new payday loans that place portions of the loan fees in credit union savings accounts that the borrowers can access after six months if they meet the terms of the loan agreements. The more loans borrowers take, the more money they can save.
"We would expect that people would begin to use that savings to eliminate the need to have a cash advance," said Tom Nix, who co-founded the store chain and is now the president of Kinecta's check-cashing division.
"At the end of that six-month period, quite often the dollars that will accumulate will be about the same as what they are borrowing," said Keith Pipes, Wescom's executive vice president of finance and financial services.
The Wescom and Kinecta models were pioneered by Union Bank of California, which bought a 40 percent stake in Nix check-cashing stores in 2000. Today, Union operates a separate chain of "Cash & Save" branches that aren't affiliated with Nix and that offer check-cashing services and basic savings and checking accounts.
KeyBank, a Cleveland-based bank with branches in 13 states, also is using check-cashing services to attract low-income consumers who lack bank accounts.
Under the "KeyBank Plus" initiative, 121 branches nationwide cash payroll and government checks for non-account holders at rates below what most check cashers charge. More than $24 million in checks have been cashed through the program and 10,000 people have enrolled, said Mike Griffin, a KeyBank senior vice president. Bad-check losses have totaled only $13,000, Griffin said at a recent banking conference in New York.
Credit unions and banks are welcome on the check-cashing landscape because both are federally regulated entities that provide an extra layer of security for consumers, said Ken Thomas, a professor at the University of Pennsylvania's Wharton School of Business. Independent check cashers and payday lenders are subject only to state laws.
With 25 percent of its branches in low- and moderate-income neighborhoods, KeyBank has redesigned participating branches to be less intimidating and more inviting for low-income customers, many of whom are uncomfortable in traditional bank settings.
"We changed the colors. We changed our marketing. We really did everything we could to attract the population into the branches," Griffin said.
Experts said that better service, products and rates would prove the greatest attraction for underserved customers.
Citizens Bank, which is headquartered in Providence, R.I., and has branches in 13 states, offers one- to three-year home improvement loans of $1,000 at 1 percent interest, "which is unheard-of," said Amy Herlehy, Citizens' community development director for New York state.
While that program has been a success, others have struggled.
Several years ago, the Northside Federal Credit Union in Chicago began offering six-month small-dollar loans with reasonable interest rates to combat payday lenders. The bank ended up losing about $30,000 over the life of the program.
The KeyBank Plus initiative hopes to be profitable by 2009.
"We're going after this because we think it's a profitable business," Griffin said. It's not our philanthropy. . . . There's money to be made here."