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If you follow this blog with any regularity, you know I've been writing a lot lately about prepaid debit cards, which are increasingly becoming a challenger to traditional checking accounts.

I caught up with RushCard CEO Rob Rosenblatt this week to give him a chance to respond to my criticism of its new RushGoals savings program and what I consider high fees on the company's prepaid cards. Here's what he had to say.

Who typically uses prepaid debit cards? Give me an overview of a typical user profile.

To begin with, the user base right now is extremely broad and it is growing, in large part because of -- and by the way, I come from the banking community, so I'm well aware of the impacts of the Durbin amendment and the CARD Act before it -- the combination of those two pieces of legislation have made the banking system ill-suited to serve those customers that typically don't maintain large balances with them.

In fact, there were two quotes I wanted to cite for you. The CEO of Bank of America Brian Moynihan has said that they're going to be focusing on the top 20 percent of the most profitable customers and getting rid of the unprofitable ones. And Jamie Dimon, who's CEO of the bank I just left, Chase, mentioned that it cost $350 on average to provide a free checking account each year.

If you think about the overhead associated with maintaining a large branch and ATM system with multi-hundred-million-dollar advertising budgets, every bank in America is having to get more focused.

We define our customer set as anybody for whom the banking industry and more loosely defined check-cashing system don't adequately serve them. Those numbers are somewhere between 60 million and 70 million customers. And typically, they live in urban environments in inner-city areas, where you may see a bank branch once in a while, but you don't see many of them.

I live and work in New York City, and my son is a baseball player, and he practices on some Saturdays about a mile away from Yankee Stadium and it's a little bit of a dangerous neighborhood where he plays, and I have to drive him. In the course of that drive, we sometimes pull over to go get him something to drink, something to eat, and typically we walk into a large drug store, where in the middle of the drug store is somebody behind bullet-proof glass cashing checks at a cost of anywhere from 2 (percent) to 10 percent per check and also doing money transfers for folks who need to send money back home. That business is a little bit murky; it's not well understood.

We believe that there's a customer base out there. It's going to be a little younger than the traditional check-cashing user. There is a high preponderance of single parenting. A lot of these customers have children. Some of them are on some kind of public support, some of them earn hourly wages. Many of them, by the way, are holding down two jobs, so this is a very hardworking population that has very strong aspirations, and actually, interestingly, is relatively optimistic from a psychographic perspective about the future. Basically, they use these cards to give them what the banking and check cashing systems can't do, and that includes, by the way, the ability to have access to my money, the ability to spend in a way that is anonymous that doesn't identify me as somebody that has to pay with cash, the ability to put my money in a place that's safe and sound, and also the ability to pay my bills.

What we try to be is a fairly valued substitute for those that really don't get the proper level of value for the money from banking and check cashing.

Do you find your customers habitually and are putting money into it every month?

The best way to use the RushCard to help manage your financial needs is to direct deposit your paycheck or your government check, and that way the money is on the card immediately. And by the way, we announced today that we're giving customers access to their direct deposited check up to two days early.

But the basic thing there is that there's no fee for direct deposit, the money is automatically loaded; you can get it early in many instances. Basically, we run the highest direct deposit rates in the business and our customers do stay with us longer, and that's because we've been at it for a long time. We've been doing this for eight years. The majority of our cards were acquired over the years through our direct-response television efforts, where we really spent a good chunk of the last eight years defining the category and explaining its benefits. So our customers have made relatively well-considered decisions as opposed to just picking our card off a rack at the front of a drugstore.

Is RushCard really better than a checking account overall? I looked at your numbers and definitely, if someone's making a lot of overdrafts, it's going to be cheaper to go with the Rushcard, but now with changes to Regulation E, overdrafts are opt-in. Do you still see the RushCard as a cheaper alternative to a checking account?

The fee structure in the banking system remains in disarray. You had BofA, who was going to charge a $5 fee in any month in which a debit card was used, and trust me, you had other banks lined up ready and waiting if BofA had survived that debacle. So suffice it to say, this is a customer that typically cannot maintain the average balance required to avoid entirely a monthly maintenance. So you're talking about a customer that is incurring anyway $10 to $15 a month in these account maintenance fees. And to your point, fewer of our customers now are incurring the overdraft fees, but you've got to remember that there's a host of fees that are still sitting in the banking system.

What I'd say to you is, the reasons to get our card are relatively basic. It's about safety, convenience, peace of mind, ability to segregate funds, ability to get access to my funds early if I  direct deposit. So, to your point, if I'm someone who never incurred NSF fees or who opted out, then I may be in a better place (with a bank). But understand that for our customers, NSF fees have been a way of running their lives, and so one of the reasons we think the card is right is it prevents you from even incurring an NSF fee. Trust me when I say that our customer, if given the option, is still going to opt in to an NSF fee and should not be. It's a bad thing; it's a bad way to live.

Do you think that having no bank branches or ATM to access funds and do other business is a disadvantage? Or do you see not having that overhead is an advantage for you?

I think the answer's probably both. From the perspective of cost structure, there's no question we don't have to find a way to recoup the $350 a year that Jamie Dimon says it costs for Chase to provide checking to any customer.

On the flip side, there's no question that customers need to be able to load their cards and so the best way to make that convenient and easy and cost-free is for the customer to direct deposit. If the customer is unable to do that, then they're going to incur some kind of fee -- the Western Union fee or the Green Dot fee -- and that's not zero, so obviously it's better for us and better for the customer if they direct deposit.

But if you sign up for direct deposit, many banks, including Bank of America, will waive some of these account maintenance fees. So what it seems like you're saying is that maybe right now, if you don't run up NSF fees, free checking might be cheaper, but you're expecting higher fees in the future?

We do feel right now that by and large we are cheaper than most of the accounts offered by the Big Three, because the Big Three have quietly been imposing fees. The CEOs of those companies are on record as saying, one way or another, they're going to have to recoup the fees they just gave up. So while, for example, the BofA $5 debit usage fee has gone away, we don't think that the customer suddenly got a break.

I wanted to ask you about RushGoals, because that was kind of the catalyst for our conversation today. So it's not a savings account?

It's not a savings account. We're not a bank at the moment. We enjoy the services of a bank through a company called Bancorp. But basically, this is a reward product right now, and it was developed in response to feedback from customers that they have trouble segregating their money and what they're looking for is help with their money management.

The RushGoals product makes it easy for you to establish a goal, to segregate the funds in one or more subaccounts. The two dollar a month benefit is just a rebate; it's a small reward for behaving wisely and achieving your goals. But customers told us it's not the reason why they're doing it; they're actually doing it because of the need to set aside funds.

Now, that said, you're right. If you hit the nail on the head and you set aside $500 a month and you keep it aside on average every month for the 12 months, you do earn $24. That equates to 4.8 percent, although to be clear, it's not considered bank interest. Certainly, we'll look at, over time, the appeal of savings to these customers and how we might provide it logistically. But this is something we're able to launch fairly quickly and in a way we think is very appealing to our customers from the standpoint of how they set it up on the Web. It's very intuitive and it's very easy to understand.

So you're planning on going into savings later?

We look at everything and we're always trying to understand, you know, what it is we need to do next to justify our customers' loyalty.

Is Richard Cordray's appointment at the Consumer Financial Protection Bureau going to affect your business at all?

It's always hard to know what an appointment will mean. This is a category that has never been unscrutinized. People do look at it all the time. The category in general is trending toward much greater levels of transparency, uniformity and consistency. Coming from the credit card business as I do, those have been very important factors to me, and I apply the same filter to every business I play a role in.

So I think, in general, we'll watch and wait. But a uniform set of practices means that everyone has to behave in an appropriate way and what's good for the customer should be good for the business.

What do you mean when you say the business has been scrutinized before, who in particular are you talking about?

I'm talking about the fact that there are attorneys general that look at this business all the time.

That idea that you don't see a lot of banks in the neighborhoods that you feel like RushCard serves is interesting. It sounds almost like the banking equivalent of "food deserts" -- areas where there aren't any grocery stores. So the idea is you're trying to bring financial services into areas where there aren't a lot of options?

Yes. I can't speak to our competitors' demographics, but we really do serve an urban customer that traditionally is ignored by the banking system.

It seems like RushCard customers might still need to use a check cashing store. You do cash checks, but it takes up to 10 days, right?

It does, and as a result, (check cashing) is the least used, least effective way to load your card. And it's simply because we have to go through a certain amount of verification to make sure the information the customer has given us matches up. Certainly we'd like to do a better job of that, but because of the customer we serve, it hasn't been an area of focus because we really are focusing on the unbanked.

Read more: Prepaid debit: oasis for unbanked? | Bankrate.com http://www.bankrate.com/financing/banking/prepaid-debit-oasis-for-unbanked/#ixzz1jHbujvKe

Reuters) - As tax season begins, a decision by Wal-Mart Stores Inc to offer some free and discounted tax preparation in conjunction with its check-cashing services at more than 3,000 U.S. stores is less about giving back and more about bringing in, experts cautioned.

Could your bank teller go postal? Offering basic consumer banking services in the form of prepaid debit cards is just one of many ideas the U.S. Post Office is considering to boost its bottom line.

The government agency is in desperate need of revenue and raising the price of stamps -- to 45 cents for a letter starting Jan. 1 -- is hardly enough. Annual losses for the post office could reach $16 billion a year by 2016 unless Congress passes legislation that allows it to branch into other business activities, The Wall Street Journal reported.

The post office could also make money by offering diverse services, such as leasing its trucks to the private sector, acting as an operations consultant for retail shipping, or selling non-postal goods among other ideas, the Journal reported.

But expanding on a service it already provides -- offering basic bank transaction services -- could be a boon to millions of underbanked Americans. A report from the Post Office's Office of the Inspector General earlier this month suggested that the independent government agency move into the prepaid debit card business.

A U.S. Post Office spokesperson said that the organization is considering the recommendation, but hasn't made a decision.

Offering prepaid debit cards could help the growing number of low-income Americans who could find themselves marginalized by the rising fees at retail banks. With one in three people willing to change banks over fees, there are signals that many consumers are looking for new alternatives to their banks. The post office already offers basic transactions like check cashing and money orders and prepaid debit cards would be a natural evolution for the institution.

Add to that, the increasing emphasis on electronic payments. Both the government and employers are moving toward direct deposit for all payments, while many companies are channeling customers into paperless billing.

Would you use the Post Office as a bank if it offered reloadable and prepaid debit cards? We want to hear from you.

TALLAHASSEE--At a Cabinet meeting today, Florida Chief Financial Officer Jeff Atwater announced the creation of a working group to review the practices of certain bad actors in the check cashing services industry aiding in workers' compensation premium fraud, which is putting pressure on rates and crippling the business community.  The working group will include representatives from the CFO's Division of Insurance Fraud as well as the Office of Financial Regulation, the Attorney General's Office, and the construction and money services industries.

"This growing crime trend is diverting more than a billion dollars from Florida's economy," said CFO Atwater, whose office oversees the Divisions of Insurance Fraud and Workers Compensation. "We are committed to dismantling this scheme and putting these cheats behind bars. Bringing together stakeholders will take us one step closer to the solutions we need to expedite jail time for these con artists."

According to Atwater, this latest workers' compensation premium scheme is highly organized and orchestrated by individuals who know the construction and subcontracting industry and are intent on evading payment of workers' compensation premiums. Florida law generally requires every employee in the construction industry to be covered by workers' compensation insurance.  The effect of this scheme is that workers are left unprotected and honest employers suffer from an uneven playing field because they are consistently outbid on construction projects by those who skirt premium requirements.

"These organized schemes are disastrous to honest businesses that pay their workers' compensation premiums and protect their employees on-the-job," said Attorney General Bondi. "Not only is this fraudulent activity costly to the insurance industry, but also it leaves individuals without protection.  We look forward to collaborating with the work group to pursue and prosecute these con artists."

John Askins, Director of the Division of Insurance Fraud, and Major Geoffrey Branch, Bureau Chief of the Division of Workers' Compensation Fraud, testified on how the scheme works and how it leads to the avoidance of premiums.

Organized criminal enterprises set up "shell" or fake companies and obtain a minimal workers' compensation insurance policy.  Uninsured contractors pay a fee to use the shell policy, enabling them to avoid purchasing required workers compensation insurance.  

The uninsured contractor presents a copy of the shell certificate of insurance to a general contractor, and often gets the job because he is able to underbid honest contractors by removing the cost of workers' compensation insurance from his expenses. The scheme uses money service businesses to cash the checks that are made out to the shell company.

Atwater said the working group will develop recommendations to help stop hundreds of millions of dollars that are being diverted from Florida's economy. Recommendations from the work group will be presented to the Governor and Cabinet in late fall.

If you have any information regarding suspected insurance fraud call 1-800-378-0445. Individuals who provide tips can remain anonymous and are eligible for a reward of up to $25,000 for information that directly leads to an arrest and conviction in an insurance fraud scheme.  The Department of Financial Services to date has awarded almost $250,000 to approximately 40 citizens as part of its Anti-Fraud Reward Program.

By: Carolyn Said, Chronicle Staff Writer

 

A steady stream of people in need flows through Granters Jewelry & Loan, an El Cerrito pawn shop with a carved carousel horse in the window and a cigar-store Indian in the vestibule.

Two guys hock a guitar for $300 to get rent money. A woman offers up a diamond ring for cash to pay her PG&E bill. A man pawns a laptop for $40 to last until payday. A mother with two toddlers in tow counts out $99 to repay a loan plus interest so she can retrieve a necklace and some rings.

"It's hard times," said Tammi Owens of San Pablo. A student of early childhood education, she was pawning her removable "grillz" gold teeth until the school year starts and she gets her financial aid check. "There are no other options," she said. "I have to pay my bills."

Pawn shops fling open a window onto how hard many Americans are struggling to make ends meet these days. With credit tight and jobs scarce, more people than ever - including middle-class consumers and small businesses - are hocking possessions to get quick cash, although they pay a price in interest and fees.

"We have the pulse of the economy," said Vito Wise, proprietor of Granters. "There is definitely an increase in people getting loans and selling things."

He's also seeing new types of customers. A contractor pawned his Rolex for money to make payroll until his accounts receivable came in, he said. A high-end professional who was buying a house pawned his watch and his wife's jewelry to get $10,000 without jeopardizing his upcoming mortgage.

The owners of a new store down the street brought in their jewelry for cash after the bank reduced their line of credit. "They told me if it weren't for the money I was able to lend them, they would have had to close their doors," Wise said.

Bigger, riskier loans

Over the past 18 months, the average pawn-shop loan in California has risen to $150 from $85, according to the California Pawnbrokers Association. At the national level, defaults on pawn loans are rising, said the National Pawnbrokers Association. If a customer defaults, the pawnbroker keeps the pawned item to resell.

"The pawn business supplies short-term small-dollar loans to people who have nowhere else to turn," said Emmett Murphy, a spokesman for both the California and national associations. "Because of the economic situation, consumers are using it a lot more."

The skyrocketing price of gold - now topping $1,600 an ounce - is bringing in more customers eager to cash in on the modern-day gold rush.

"Almost everyone can go through their jewelry box and find a class ring, outdated bracelet, earring where they've lost the other one," Wise said. "A gentleman came in just yesterday with three gold fillings he'd had in his junk drawers since forever. Each one was worth 50 to 100 bucks."

Image improving

Popular TV shows like "Pawn Stars" and "Hardcore Pawn" have fueled interest and helped pawn shops shed their image as seedy havens for stolen goods. (Stolen merchandise is actually not common, as customers must provide ID, a signature and a thumbprint, and proprietors share information on pawned items with local law enforcement.)

Granters is a case in point. Situated between a locksmith and a barber shop on busy San Pablo Avenue, it's a clean, well-lighted place crammed with neatly organized merchandise. Guitars, guns and memorabilia hang on the walls; jewelry and coins glitter from within glass display cases; wooden shelves are packed with cameras, collectible dolls and clocks.

Vito Wise's father, "Uncle Ralph" Wise, a retired police officer, bought the pawn shop in 1993 from the Granter family, which started it in 1942. An assortment of Wise cousins and in-laws works behind the counter. "We have our characters," Wise said, ticking off his workers' nicknames. "There's Big Chris, Rock Star Dave and Handy Andy."

The workers are all accustomed to making quick judgments about items' worth. For gold, an acid test establishes its purity. Pawnbrokers lend less than items' resale value; they need a markup to cover overhead. Wise, for instance, said he lends about half to 80 percent of an item's resale price, which in turn is usually half to a third of retail.

"Big Chris" Fuller, a massive man with heavily tattooed arms who formerly was a bodyguard at Casino San Pablo, said customers are unlikely to tangle with him. Vito Wise wears a handgun on his hip as another safeguard, although he said he's never had to use it.

"Right now these are very serious times," Wise said. "There are desperate people in any business. We have to protect ourselves and our customers."

'Positive people'

Several customers said they appreciated the service Granters provides. "These people are positive people and they work with you. I think it's awesome they're here," said Kerian Owen, 52, of El Sobrante, who was pawning jewelry for money to fix a broken computer so she can get online and seek a cheaper place to live.

Owen, a former teacher's assistant, now on disability, added: "It's better than a bank because you get the money up front. The bank will charge you $35 if you write a hot check to get food for your kids, and it affects your credit. Here you can get the money and you have four months to get (your pawned item) back. A bank is a lose-lose situation."

In reality, pawn-shop customers pay a premium for the convenience of a quick, collateral-backed loan with no credit check.

California regulates pawn shop fees on loans up to $2,500. For a three-month, $100 loan, a customer pays $17.50 in fees and interest. On an annualized basis, that would work out to 70 percent interest.

"The pawn loan is obviously more expensive than the interest you'd pay on a loan from the bank or on a credit card," said John Caskey, an economics professor at Swarthmore and author of the book "Fringe Banking: Check-Cashing Outlets, Pawn Shops and the Poor."

Still, he sees a place for pawn loans. "It is a credit source for people who don't have good alternatives," he said. "Maybe they could borrow from a family member but would get a lecture about how they mismanaged their money. For people who just want a quick transaction, it provides a service."

Most pawn-shop customers pay back their loans. "As hard as times are, you want to keep your possessions," Owen said.

At Granters, about 10 percent of customers used to forfeit their items. Now that's up to about 15 percent, Wise said.

Some customers pawn the same items again and again.

"This is my first time here, but it's been here before," said Winston Smith of San Pablo, gesturing at the small laptop he was pawning. "My mother usually brings it in. It definitely helps to come here when payday is kind of far away."

How pawning works

Pawnbrokers offer short-term loans with items of value used as collateral. Most customers redeem their valuables within a few weeks by repaying the loan, plus interest and fees. If they don't return to the shop by a specified time, the item is forfeited and the pawnbroker can sell it. Pawnshops also buy goods as well as making loans against them.

Generally, a pawn loan is for about half of the item's potential resale value. Customers must sign a statement that they own the item and provide identification and a thumbprint. This information is shared with law enforcement.

California regulates how much pawnbrokers can charge on loans up to $2,500; for loans over that amount, the pawnbroker is free to set any rate.

Suppose you pawn a necklace with a resale value of about $200. A pawnbroker would offer you a loan of $100. For a 90-day, $100 loan, you would pay $12.50 in interest plus a $5 set-up fee, for a total of $17.50, which works out to 70 percent on an annualized basis.

 

A former Stony Point man has been accused of stealing $10,455 from a local cash-checking business resulting from a workers compensation claim, the Rockland District Attorney's Office said today.

Robert Ascolillo took advantage of a mistaken address on a check to pocket $10,455 sent to him in November 2008 by his insurance carrier, Continental Casualty, Inc., prosecutors said.

Ascolillo is accused of asking the insurance company to put a "stop order" on payment of the check for a 2007 workers compensation claim and reissue the note to him.

He then cashed the first check before the stop order went into effect at David's Money Center cash-checking business in West Haverstraw, District Attorney Thomas Zugibe said in a news release today.

When the new $10,455 check arrived in the mail from Continental Casualty, Ascolillo deposited the check at his bank account, benefiting by twice the amount of his claim, Zugibe said.

Because Ascolillo got the payment of the first check stopped, the insurance company did not cover the $10,455 check cashed at David's Money Center, leaving the business short the money, Zugibe said.

Continental Casualty asked Ascolillo to to return the proceeds from one of the two checks, but he refused and claimed through his lawyer that he deserved the money, Zugibe said.

David's Money Center went to court and won a court judgment for $10,455 from Continental and Ascolillo.

Ascolillo defaulted, leaving the insurance company to pay the check cashing business, which operates in several Rockland communities and in New York City.

Ascolillo, who now lives at 1 E. Indiana Ave., Beach Haven Terrace, N.J., was charged with one count of third-degree grand larceny following an investigation by the Rockland Special Investigations Unit and the New York State Insurance Department Fraud Bureau.

He waived an extradition hearing to New York to face the felony charge and was brought back on Aug. 1. Conviction of the grand larceny count carries a maximum of seven years in state prison.

Ascolillo was arraigned Friday by state Supreme Court Justice William A. Kelly and ordered held on $2,500 cash bail or a $10,000 bond. He is scheduled to return to court on Sept. 7.

HOUSTON (KTRK) -- Two people are accused in an elaborate counterfeit check cashing scheme at Houston area stores.

Dante Sumlar is the alleged mastermind of the group. Two of his alleged accomplices, Jennifer Lynn Mullinax, 40, and Christopher Antone Hill, 46, are facing charges of engaging in organized criminal activity. According to court documents, Sumlar hired a homeless man in December 2007 to try to purchase gift cards using a $5,000 forged cashier's check at a Walmart in southwest Houston. The clerk became suspicious due to the large dollar amount of the check, and with the help of a bank clerk, found the check to have the routing number from Texas State University. The employees called police.

Houston police arrested the homeless man, Steven Maheux, who told investigators that he was picked up at a homeless shelter by a black man named "Tony" and paid $200 to cash the checks. Maheux said another man named "Chris" picked him up, bought him some new clothes at Ross and drove him to the Walmart to cash the check. Maheux said Chris had eight other checks with him at the time.

Using surveillance video from Walmart, police identified the owner of the car as Christopher Hill. Court documents state Hill told police that he would drive white males around town to cash checks for a man named "Rick," who Hill also knew as Tony. Hill said he was paid $200 each day he drove and stated that a total of about $40,000 in checks were cashed.

Hill told police he knew a woman named Jennifer Mullinax who worked for Rick. Mullinax told police that Rick would pay her cash and crack cocaine to rent vehicles for him. She later told police that she knew Rick's identity from a Harris County arrest. She said she looked through bondsman file pictures and located a file on George Deshane Marshall. She told investigators that she picked up Marshall from jail after the arrest and transported him to the bondsman.

Police then discovered that Marshall was an alias for Dante Karyn Sumlar, 34. Sumlar was a fugitive wanted by the US Secret Service in Mobile, Ala. and Jacksonville, Fla.

According to court documents, Mullinax told police that Sumlar paid her up to $500 in cash and $300 worth of crack for renting cars for him until December 2007. She said Sumlar also paid her about $2,000 to answer phones in the check scheme. The forged checks had a toll-free verification number printed on them and Mullinax would answer the line when clerks would call to verify the fake checks, court documents state. She said Sumlar gave her instructions on what to say when clerks would call the number and how to act like a legit business.

In November 2010, Sumlar was located and arrested. He later plead guilty to all federal charges against him. Court documents state Sumlar said he moved to Houston in February 2007 from Alabama and used aliases Tony and Rick while here. Sumlar told authorities he alone printed all of the counterfeit checks and would make up the routing and account numbers. He also said he targeted such businesses as Walmart, Best Buy, Macy's, Toys R Us and Target, according to court documents.

The police investigation revealed 21 counterfeit cashier's checks in the Houston area for a total loss to merchants of $92,500.

By Richard B. Kelsky

In what seems like the blink of an eye, the check cashing industry has changed. Your business model must change with it. And it must change now.

In recent years -- particularly the boom ones that preceded the current recession -- many check cashers adopted an ostrich's approach to change. True, some trotted out the ladders, brushes and cans of Benjamin Moore, and called in the contractors and signage companies, but most did not think in terms of changing business models: disappearance of government checks, managing cash flow, P & L and balance sheet, direct deposit, debit cards, changing emphasis from transaction fees on in-store transactions to recurring revenues, and how marketing (an historic check cashing no-no) could drive revenues. Few, if any, considered analyzing their business at 20 percent less volume.

As we move deeper into this decade, the pace of industry change will only accelerate.

For tough-times guidance on business models, I suggest learning from recent immigrants entering the industry. They couple solid financial analysis with an unwavering faith in the opportunity in this country, and a commitment to succeed now, when the going is hardest. It's also wise to look toward counter-cyclical and counter-directional hedges that can offset losses in current revenues, both today and over time.

Recession is always a period of great creativity. In sector after sector, technology is enabling productivity gains and more efficient management of cash, and just about everything else. But technology is also changing the expectations of customers regarding what they'll pay and to whom.

The Business is Evolving

The primary evolutions in this business are toward the immigrant model, and recognition that ancillary and recurring revenue streams will determine future success.

Government checks are disappearing. There's no arguing this. The Feds are getting out of the check business, and the states are following close behind.

In some states, citizens have been successful in mandating a paper check option. But as cost pressures and large-bank lobbying efforts are brought to bear on state legislators and regulators, it's just as likely that attempts to preserve the paper check option are falling on deaf ears.

Direct deposit to prepaid cards is a short-term shot at mitigating the loss of government checks and a long-term opportunity of building recurring
revenue, but direct deposit and debit cards have to be managed on an ongoing basis to give them staying power (they won't manage themselves!), and you have to start working on your long-term plan today.

Cash lives. Despite the relentless drumbeat of debit card vendors, you are still in the check cashing business. That business cannot be ignored and must be nurtured. Cash remains an important component in American lives.

So the next time someone tells you cash is an extinct species, ask if they handed their debit card to that guy who just plowed a surprise foot of snow from their driveway, or towed their car off a lonesome stretch of road at 3 a.m. Or just walk by a large bank branch on a Friday evening in a major city: six ATMs, and all with a line.

Your Customer Base is Evolving

The economic crash has lost you some longtime customers. Whether they return to cash checks in the future, no one can say. Commercial check volumes have also been dramatically impacted by the recession. You will have to work smarter to grow your customer base and new lines of business.

At the same time, increased regulation is working to expand the unbanked population. The banks' response to regulations that have capped or eliminated certain fees is to limit, charge or charge more for services which, until very recently, have been provided for free, or nearly for free.

The result? More folks will be filing for divorce from their banks and realizing it's actually less expensive and easier to use your services.

Quickly changing their tune, banks have rapidly retreated from seeking out the traditional unbanked customer. Just look at their marketing, of which they are doing plenty.

I heard of one that was offering a free e-reader in exchange for opening an account with $10,000. That tells me the bank's target isn't people living paycheck to paycheck. Instead, they're going after an audience that has the leisure time to read. People who can afford to move $10K from another account for a free gift.

Their other target appears to be Gen Y, with high-tech account management promises and automated this-and-that. The problem is that now comes with a price tag.

To earn a greater share of the evolving unbanked's (and underbanked's) business, you need to better understand the shifting demographic of the customer base, and the marketing and market trends that are expanding your opportunities. Consider these:

Baby Boomers: This group thrives on old-time familiarity and steadiness of service. The problem is, this group is aging and moving away from paychecks into government benefits.

But just as aging Boomers are moving toward fixed-income, banks are creating and increasing fees, so their interest in banks is not likely to grow. Keep up the good work with this group and immediately institute programs to inspire customer loyalty and provide an increased range of services, including direct deposit.

Generation X: Gen X -- born from the '60s to as late as about 1980 -- is moving into midlife. Their stage of life, coupled with the fact that Xers came of age with PCs, means they're partial to more traditional marketing, but with a technology lean.

Generation Y: Gen Y -- born from about 1980 through the early 2000's -- require an open mind to new methods of marketing, plus conveying the feeling that you care about them personally.

Remember, this is the group that came of age with the Internet. The notion of a "mass market" that listens to broadcast TV and blindly buys what Madison Avenue tells it to is foreign to Gen Y. Its members have grown up in a peer-to-peer marketplace. An endorsement of a product or service by their digital "friends" and a caring touch has a much greater influence on their purchasing decisions.

Your Market Reach is Evolving

Smartphones have made it possible for you to reach out much farther and faster into your existing and potential markets than ever before. Since most post-Boomers communicate by text or through social media, you need to use those methods to communicate with them.

The old-school idea that your market is limited to those who already enter your premises, and that they must live within a six-block radius of your store, is just that: old school. With the right combination of technology and traditional approaches you can reach existing as well as potential customers.

Employ a combination of low-marginal-cost, high-penetration Internet and smartphone marketing, onsite marketing, and loyalty programs -- you can (and must) reach beyond your old geographic borders to draw new customers and expand your business with current ones.

Of course, expanding your market reach beyond your old-school neighborhood may mean extending it into the neighborhood of another store owner that you never before considered a direct competitor.

Like it or not, you can't avoid dealing with the shifting economics that come with being part of a maturing and fast consolidating industry. What you can do is use every technical advantage to come out on top in this Darwinian struggle to adapt and thrive.

All of this activity will involve data and data analysis. So you need to get to work to make sure every single one of your customers -- and every transaction -- is in your database, and you may have to purchase supplemental databases, as well.

Consider this: It's impossible to communicate with a walk-in customer when they're not in your store.

The Economics are Evolving

Borrowed money isn't all it's cracked up to be. In a declining revenue scenario, debt -- or more to the point, debt service -- is bad. Unless it is for growth under a realistic plan, if you don't have debt, don't start now.

Focus on profitability. Do you have a set of readable monthly financial statements? Do you actually understand them? Do you understand the difference between profitability and cash flow? Do you know how you spend your time each day? Do you start each day with a plan (even if you don't stick to it)? Or do you just seem to move from mini-crisis to mini-crisis?

Those who continue to think they can manage their business by the seat of their pants will end up losing their shirt.

Ancillary and recurring revenue are becoming more important. Whatever the source, whether wires, debit cards, bill payments, ATMs, money orders, alternative energy providers, or POB transactions, you need to focus attention on these types of products. A combination of intelligent product selection, offering of multiple competitive products, and marketing can produce significant bottom-line results.

Take, for example, competitive wire companies: smaller established wire companies which cater to single country markets, have numerous agents in their home country, and are sought out in the communities they serve here.

Similarly, as I stressed last year, because each customer's transaction pattern will drive the correct debit card for them, you need to offer a selection of debit cards. Customers keep their debit card relationships longer if they are happy.
Debit cards and other ancillary products produce recurring revenue, even though the customer is not in your store. This shift -- from on-site transaction revenue to off-site recurring revenue -- will take time. You need to start now to build recurring revenue streams for the future.

The Immigrant Model

In addition to adopting a more disciplined managerial approach, expectations per store must change.

A few years back, there were many people in this industry who made a living from only one store. While that's still possible, it is becoming increasingly less common. In fact, it's becoming increasingly difficult for two or three stores.

The good news is there is already a successful model you can emulate: The immigrant multi-store owner. Many longtime owners of single store operations might be tempted to look at the current market with a self-pitying longing for bygone days that will never return. Not so the immigrant multi-store owner, who looks to the future and sees untold possibilities, if only he can achieve sufficient scale.

Rather than a feet-in-concrete view of one store that hits an improbable home run, this model relies on hitting singles -- lots of them. It's a combination of "Don't put all your eggs in one basket" and "The whole is equal to the sum of its parts." It also includes other lines of business, if state law permits.

The math behind this model goes something like this: 1 big store x $100,000 (check cashing income) = $100,000. (Risky.) But 15 smaller stores x $35,000 (check cashing income) = $525,000. (Less Risky and Way More Profitable.) And 15 stores x $35,000 (check cashing income) + $24,000 (other lines of business income) = $885,000. (Even Less Risky and Even More Profitable.)

Which would you rather have? One four-window store with revenue at risk and sky-high overhead, or 15 one-window stores, with stable core revenue, respectable ancillary and recurring revenue sources, other lines of business and manageable-overhead? The answer is obvious.

Granted, the sustainable multi-store number may not be 15 in your market, or you may not be in a position to acquire that many locations. Depending upon your market and your appetite, it could be five or six or seven stores.

The important thing is to adopt a mentality that sees smaller-store/multi-store scale as a hedge against risk, and a door opener to greater top and bottom line growth then you'll ever see from a one-shop op.

Ultimately, success under the new model hinges on figuring out how much you can reasonably expect to make from each location, building ancillary and recurring revenue, and working and living within your means.
As I've reminded readers before, never ask more of your business than it can give. No model -- no matter how attuned to change and how successful -- can survive an owner who places unrealistic demands on the business.

Richard Kelsky is president of TellerMetrix, a provider of POS transaction, compliance, interface, electronic deposit and marketing software to check cashers, payday lenders and retail banks. He is also a New York and Connecticut Bar member, a Polytechnic Institute of NYU and New York Law School grad, a Certified Anti-Money Laundering Specialist and a frequent lecturer on business, legal, compliance, and technology issues. He can be reached at: rkelsky@tellermetrix.com