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Low overhead is key to profitable check cashing

After the failure of InnoVentry late last year, many deployers wondered whether check cashing could be successfully implemented into an ATM program. Yes, say former InnoVentry principals who have created a company called CashWorks. The key is controlling overhead.

March 13, 2002

High overhead can kill even the most promising business ventures.

Case in point: InnoVentry, the failed deployer of automated check cashing kiosks.

The company went out of business in September of 2001 after deploying some 1,200 of the kiosks at retail sites in 24 states, including Kroger, Circle K and Albertson's stores.

While InnoVentry proved there was ample interest in the service - with the company cashing a million checks a month at its peak, according to its former Chief Operating Officer Ken Rees - it also illustrated the pitfalls of a costly business model.

"The cost of entry and break-even was just too different," Rees said, noting that InnoVentry's program was characterized by unwieldy $40,000 kiosks and an expensive service and support infrastructure. "The average site is not doing 1,200 transactions a month, and you're not going to be able to cover the cost of the machine."

Bringing down the break-even

When Rees founded CashWorks, a new automated check cashing business, he set out to create a business model with a break-even point of 300 check transactions a month. The program, which uses a proprietary point-of-sale terminal called PayPort to approve checks and existing ATMs to dispense cash, has a far lower break-even point than Rees' original expectations - 25 to 50 transactions a month.

A PayPort terminal typically will cost under $2,000, although Rees said ISOs can negotiate specific cost with merchants. Unlike the InnoVentry model, with its high-end kiosk, the only necessary modification to an ATM is installation of software. Using a POS terminal also eliminates the need for additional floor space, a coveted asset in the retail world.

Another former InnoVentry principal, Mike Stinson, is chairman of CashWorks. Stinson is a co-holder of three U.S. patents and a UK patent related to check cashing technology.

Pilot partners

Earlier this year, CashWorks partnered with ATM manufacturer Tidel to roll out 25 pilot locations in Texas. In its first six weeks, more than $600,000 was dispensed from Tidel ATMs at six locations - with no promotion other than banners at participating stores.

"We find that check cashing brings customers into our stores and provides fee revenue, but have been unhappy with the large footprint and risks associated with other solutions," said Devin Bates, chief information officer of Town and Country, a Texas-based convenience store chain with the first two CashWorks locations. "The CashWorks solution is small, fast and doesn't require additional cash inventories in the store."

Tidel will begin shipping all of its new machines with CashWorks software beginning next month, according to Tidel Interim Chief Executive Officer Mark Levenick. Tidel machines "going back several generations" can be retrofitted with the necessary software, he said.

Tidel has invested $500,000 in CashWorks in the form of convertible debt, which will convert to CashWorks stock when the company's next round of funding closes. "The fact that they were able to put together this loan shows how serious they are about their business," Rees said.

CashWorks also expects to partner with other ATM manufacturers, Rees said.

The way it works

Fees assessed for the check cashing service are set by the merchant and ISO, but Rees said it's important to offer a fair rate to drive transactions. CashWorks suggests a fee of 1.95 percent of face value for typed payroll and government checks (85 percent of checks cashed fit into these two categories, he said) and 3 percent for hand-written payroll checks, with a $3 minimum charge.

As the program grows, Rees said CashWorks will begin accepting second-party personal and possibly even first-party personal checks - though those categories will likely carry a $1,000 limit because of the higher risk they carry.

The CashWorks program is not entirely automated; another key to risk management is the requirement for a store employee to check a customer's photo identification each time a check is cashed. "The problem with a fully-automated solution is you never really know who the payee is," Rees said.

The clerk also swipes each check and keys in the amount on the PayPort. The customer then enters a Social Security number and PIN (which he selects during enrollment). The information is relayed via a dial-up connection to CashWorks' Central Decision Engine, where it is authorized, refused or referred to a call center operator if additional information is required.

If not referred to an operator, the process should only take about 30 seconds, Rees said. Enrollment takes perhaps an additional 30-45 seconds, he said, primarily because a clerk must capture information from a customer's ID and the customer must select a PIN. The company guarantees a decision on checks within five minutes.

Both the customer and the clerk have an opportunity to review the amount to be dispensed (check's face value minus fee) before a receipt is printed. If both approve, the customer receives a receipt that includes a code that he will enter at the ATM (no card is necessary) to get his cash.

As most retail ATMs dispense $20 bills only, the clerk will also provide any additional denominations from the store till. Though this will require more human intervention, Rees said it's more cost effective than adding additional cassettes to ATMs.

What surprised him most when he visited the pilot sites, Rees said, was store clerks' ability to perform multiple tasks. "It was amazing how they could use the cash register and the PayPort at the same time," he said. "They would ring up a gallon of milk for the next person in line while they were waiting for check approval."

Why it works

The CashWorks program is one of the most promising applications he's seen to date, said Tidel's Levenick. "The investment required from the retailer is minimal, so they get a return on investment with a low number of checks. And customers who cash checks usually spend some of that money in the store," he said.

Sites favored by retail ATM deployers, such as convenience stores, tend to have customers with demographics that match those of people who utilize check-cashing services, Levenick noted. "This fits perfectly into our industry. Our ISOs are going wild over it," he said.

CashWorks transactions could make it possible to deploy ATMs in sites that do not have enough traffic to justify installing a machine based on ATM transactions alone, Levenick said.

Mike Burnick, a consultant for Sourcetronics, the Dallas-based ISO that deployed the Town and Country locations, said it's far easier to sell retailers a check cashing program that requires little new investment on their part. "You're giving the ATM owner a chance to increase their profitability right away," he said.

Revenue is split between the merchant, the ISO and CashWorks, Burnick said, although there is no standard formula. As with any ATM program, revenue sharing will likely depend upon who owns the machine and how much responsibility the merchant assumes for cash replenishment and other tasks.

"We do not have anything set in stone, nor do we want to," Burnick said. "We're proceeding down a learning curve."

It's conceivable, Burnick said, that cash costs could increase if enough checks are cashed. If cash needs increase, armored car deliveries might have to be scheduled rather than having the merchant replenish the cash himself, for instance.

Yet this doesn't bother Burnick. "We hope the success is such that we have to bring in extra deliveries," he said.