New Competitors Set Up Check-Cashing Counters

Lucrative margins and growing volumes attract large companies

A RACE could soon be under way between Southland Corporation and Western Union to see which company will be the first to take the booming but oft-maligned business of check cashing nationwide.

At the moment the check-cashing industry consists of 5,000 stores that are individually owned or members of small chains. The Federal Reserve Bank of Kansas City made what it called a conservative estimate of the industry's 1990 activity: $790 million in cashing fees on 150 million checks worth $45 billion.

Check-cashing businesses in Illinois earned a return of 9.12 percent on their assets between 1988 and 1991. Other service businesses with similar capitalization earned an average 4.62 percent, says John Binder, an economist at the University of Illinois in Chicago.

Little wonder that the number of check cashers is growing at an estimated 10 percent annual rate, or that big companies want a chunk of the action.

Southland Corporation, which had 1991 revenues of $8 billion from its 7-Eleven convenience store chain, by last month had begun testing a "Service Center" concept at five existing stores in Austin. The Dallas-based company operates more than 6,200 stores in North America and licenses another 7,400 worldwide.

Southland spokeswoman Karen Raskopf says that check cashing is one of the additional products and services that customers have asked 7-Eleven to offer. Service centers are part of the company's come-from-behind strategy. In 1987 Southland was taken private. But carrying the $4 billion in debt became difficult as the economy softened and gasoline retailers moved into the convenience store business.

"We had a whole lot of competition with deep pockets," recalls Cecilia Norwood, a spokeswoman for Southland.

Check cashing is also on the menu of New Valley Corporation, a $450 million company whose primary subsidiary is New Jersey-based Western Union Financial Services Inc.

Western Union began opening Gold Star Check Cashing outlets in the San Francisco-Oakland area in August 1991. The new company is a joint venture with Thomas Nix Distributor Inc., a 25-year-old check-cashing chain operating in southern California.

Warren Bechtel, a spokesman for Western Union, says the company has established 10 of the 20 Gold Star outlets originally planned. "The stores have been doing well," he says. "If we're pleased with the results of the operation, we would expect to extend it to other areas," but not before next year.

In that event, Mr. Bechtel's company expects that the "Western Union Financial Center" subtitle on Gold Star's signs will give the business name recognition. There's a similar profile for customers of check-cashing services and those who use Western Union to wire money to worldwide locations, he adds.

Stephen Brobeck, executive director of the Consumer Federation of America, is critical of the check-cashing industry in general. Some charge "exorbitant" rates of 10 percent of the face value. Even a 2 percent fee is likely to be more than the cost of maintaining a checking account, he says.

According to the Southland Corporation, market research has found that two-thirds of the people who use check cashers do in fact have a checking account. As for 7-Eleven's check-cashing fee, "We're not into insult pricing," she says. "We want to attract people to us."

7-Eleven charges 1 percent of the face value of third-party checks, and 5 percent on personal checks. Mr. Brobeck acknowledges that a higher fee on personal checks is warranted because the casher's risk is higher.

Brobeck says that states need to regulate the check-cashing industry effectively. New York caps the fees at 1 percent of the face value of government-issued checks. The Illinois Department of Financial Institutions is weighing whether to lower the cap on fees. The maximum in Illinois currently is 90 cents plus 1.2 percent of the check's face value.