Article

Check cashing gets another chance

The growth of CashWorks, a company founded by several InnoVentry principals and purchased by GE Consumer Finance in in March, and the entry of several start-ups seem to signal a renewed interest in self-service check cashing.

February 21, 2005

The failure of InnoVentry temporarily put the brakes on what seemed to be a promising new self-service application, automated check cashing.

InnoVentry raised an amount believed to be as high as $40 million and deployed 1,000 terminals in retail locations before abruptly ceasing operations in September of 2001.

On paper, its plan to serve the millions of Americans without bank accounts by offering them a convenient alternative to cash their checks made sense. But an expensive infrastructure and management missteps crippled the company.

Now the growth of CashWorks, a company founded by several InnoVentry principals and purchased by GE Consumer Finance in March, and the entry of several start-ups seem to signal a renewed interest in self-service check cashing.

Getting better all the time

Industry watchers think the service will fare better this time, largely due to the availability of improved technology at a lower cost. Consumers are also increasingly comfortable with self-service terminals, as evidenced by their growing popularity at airports and other busy locations. 

"I compare InnoVentry to Mount St. Helens. It made a big explosion and a lot of damage was done," said Don Jarecki, senior vice president of business development for the Electronic Banking division of California's Palm Desert National Bank.

PDNB, which provides vault cash and other cash management services for more than 15,000 ATMs nationwide, is partnering with start-up Vero to offer check cashing services to its customers. "Now you've got improved risk engines and identification methods and lower cost hardware that are making it possible to offer a cost-effective solution," Jarecki said.

The recent passage of Check 21 gave automated check cashing a "jumpstart," said Brent Turner, executive vice president and chief operating officer of Texas check-cashing start-up Financial Payments. "The economics make a lot more sense when you don't have to pay a carrier $70 a pop to go out and collect checks from a machine every day."

Jarecki worked for EDS when that company offered what he called a "crude" early version of automated check cashing at 7-Eleven stores in the late 1990s. Though there was no mass market promotion of the service, Jarecki said it attracted a significant number of users.

"The demand is there," he said. "There is no other killer application with ATMs; the surcharge was it. Check cashing has the most mass market potential among what will probably end up being a number of niche products offered at ATMs."

CashWorks

Check cashing was the first service introduced at 7-Eleven's Vcoms and remains the centerpiece application of the 1,000 terminals the company has deployed to date. Original provider Certegy pulled out of the project in April and was replaced by CashWorks.

CashWorks has grown its installed base of terminals by 15 percent in the past three months, though much of that growth came from the 7-Eleven deal. It now operates at 3,100 locations.

In September, the company received approval from the Office of Thrift Supervision to become an operating subsidiary of federal savings bank GE Capital Consumer Card Co., which will enable CashWorks to operate in all 50 states. In October, it announced a deal to roll out check cashing at more than half of Circle K's 2,200 locations.

Existing locations use the PayPort, a proprietary point-of-sale terminal where store clerks enroll customers and initiate the check-cashing process. Customers are then directed to an ATM in the store to collect their cash or can receive their funds on a prepaid debit card, an option introduced in 2004's second quarter.

Mark Conan, vice president of finance and chief financial officer for the Oregon-based Plaid Pantries convenience store chain, said his company offers CashWorks check cashing at 25 of its 103 stores. It deployed two PayPort terminals in 2003 and added the rest this year. While the number of checks cashed varies widely from store to store, Conan said his company is considering adding more PayPorts.

Attendees of last month's BAI Retail Delivery Conference and Expo got a demonstration of Vero's new automated check cashing service.

"Putting money in your customers' hands while they are in your store can't be a bad idea," Conan said, noting that Plaid Pantries doesn't offer the prepaid card option because it wants to maximize its chances that customers will spend at least some of the cash in its stores. The chain does not accept debit cards for purchases, largely because it does not sell gasoline and the majority of its inventory is small-ticket items.

Plaid Pantries customers pay 2.5 percent of a check's face value to cash government or payroll checks. The chain splits the fee with CashWorks. Will Sowell, CashWorks' general manager, said a 2 percent check cashing fee is "fairly typical" among CashWorks customers, although they may set a higher fee. "They can also offer a fee below the buy rate to help drive traffic," he said.

Conan likes the idea of dispensing funds from the store's existing ATM, which is serviced by an armored carrier, rather than the till. "If you're going to do that, you've got to keep a bucket of cash in the till at all times," he said.

Sowell believes the company will grow its business even more with the addition of a new self-service kiosk that removes the clerk from the process, an option he expects to be popular at higher-volume sites. CashWorks plans to begin offering both a mini-kiosk and a larger terminal in 2005's first quarter.

"At busier locations where a large number of checks are cashed, stores prefer to take that activity away from the counter," he said. "We want to be able to offer platforms that are appropriate for all different volumes of check cashing activity."

In contrast to the PayPort terminals, which are sold or leased to merchants, CashWorks will own the kiosks, Sowell said. "We want to be able to sell a program that's not going to require a lot of capital expenditure on the part of the retailer."

Sowell also believes the kiosks will help his company break into a promising new market: financial institutions that may want to deploy the terminals at branches to serve non-customers cashing on-us checks, as well as checks drawn on other FIs.

Vero

That's the initial market targeted by Vero, an Oregon start-up masterminded by former Card Capture Services CEO David Grano and other principals of that seminal ISO, which sold its ATM portfolio to E*Trade Financial in 2000.

Vero demonstrated its solution, which utilizes a proprietary PC for an initial teller-assisted enrollment and a self-service kiosk for check cashing, at last month's BAI Retail Delivery Conference & Exposition in Las Vegas.

Grano said a teller will review a driver's license, matricula or other government-issued piece of identification, collect an electronic fingerprint scan for future identification confirmation and typically cash a new enrollee's first check.

Enrollees will be mailed a PIN-based prepaid debit card within a few days, which gives Vero "another opportunity to verify that the address they gave us was correct," Grano said. As enrollees build a credit history with Vero, Grano said the company may add the ability to make signature-based debit purchases to the cards.

Enrollees can then visit an ATM/kiosk equipped with a check imaging module to cash government or payroll checks. Vero has partnered with both Diebold and Wincor Nixdorf to offer the hardware, which Grano said could cost as little as $15,000, depending on the functionality offered.

FIs may also continue to use a semi-automated form of check cashing at the proprietary PC, which will be priced at less than $5,000. "Many financial institutions have a disparate branch network. We want to offer a solution that will be viable for even the lowest-volume branches," Grano said.

PDNB's Jarecki sees Diebold's involvement as a sign of the strength of the potential market; the manufacturer lost some $29 million on an equity investment it made in InnoVentry. "The fact that they're willing to take another shot at this shows me they think the business model is solid," he said.

Grano believes that many FIs may want to use the check cashing service to convert unbanked consumers into customers. Many FIs have already taken steps to appeal to such consumers by changing their policies to accept matricula identity cards issued by Mexican consulates in the United States rather than a Social Security number to open new accounts and by introducing new products such as money transfer services.

"We're giving financial institutions an opportunity to create new relationships with customers they've never seen before," he said.

The impetus for installing its first Vero terminal at a PDNB branch in La Quinta, Calif., came from the desire to offload check cashing transactions made by unbanked agricultural workers away from teller lines. However, Jarecki said, "We think we may be able to turn at least some of the people that we currently view as unbanked into customers."

Grano said Vero will likely employ a direct sales force to work with FIs. The company believes some FIs may want to offer the check cashing service to their commercial customers to strengthen those relationships. To really penetrate the retail market, however, Vero is counting on PDNB's ISO clients, who already have relationships with prospective check cashing customers.

The enrollment and check cashing processes will "look much the same" for retailers and for FIs, Grano said -- although enrollment can be completely automated through an ATM/kiosk. Retailers can also manage their own risk rather than having Vero do so for them, which would mean they could keep more of the check cashing revenues.

Financial Payments has six terminals like this one offering check cashing and other services at check cashing outlets in Texas.

Jarecki said PDNB will likely look to partner with other companies offering check cashing services to give its customers a choice of different hardware and software solutions.

"I expect we'll be agnostic. Our expertise is in the overall cash management, the settlement and balancing of funds," he said. "That's especially valuable if any of these folks want to add other products and services. We can settle the funds with the other application providers."

Indeed, according to Sowell and Grano, both CashWorks and Vero are interested in adding new services to their programs. Turner said Financial Payments already offers money order purchases and bill payment at some of the terminals it has deployed in the past eight months.

Financial Payments

Turner declined to disclose the total number of Financial Payments terminals but said it is approaching 100, mostly located in convenience and grocery stores. Six of them are at check-cashing outlets in Texas, a market that neither CashWorks nor Vero is pursuing but that Turner said is eager to offer an automated alternative.

"With a kiosk, you can better control your service and give check cashing customers a consistent experience every time. That's what keeps them coming back," he said.

Financial Payments demonstrated its services at last month's BAI Retail Delivery show in the booths of Tidel and Tranax Technologies, two hardware manufacturers with which it has partnered. Turner said the company is in talks with other manufacturers as well. While the company currently does mostly direct sales, Turner said it intends to complement its own sales force with a reseller channel as demand for the service grows.

Financial Payments has installed a product incorporating a POS terminal, similar to the CashWorks PayPort, in 12 c-stores. But moving forward, Turner said he expects two-thirds of his company's installed base will incorporate ATM/kiosks rather than POS terminals.

A well-designed user interface is a key to boosting usage, Turner said. He developed Financial Payments' interface based on his 15 years in the check cashing industry. "We know how these customers think."

For instance, his proprietary software automatically transfers enrollees to a call center if they are unable to complete the process within a designated timeframe, Turner said.

While Vero and CashWorks currently cash only government and payroll checks, Financial Payments cashes any type of check -- for a fee ranging from 1 percent to 5 percent.

Turner believes that automated check cashing will experience strong push in the next two to three years. "What we're seeing now is the beginning of the wave, not the peak," he said.

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