When check-cashing goes mobile

June 7, 2013

I’m at a conference on the underbanked this week, where it’s basically impossible to swing a cat without running into someone talking about mRDC, which stands for mobile remote deposit capture. Or, in English, the ability to cash a check using your smartphone.

A lot of bigger banks have had this ability for a while now: take a photo of a check using your phone, and you don’t need to bring it into a branch in order to deposit it. (And some of the bigger banks can make that process quite frustrating.) This is just a mobile way of depositing your check — it then enters into the standard banking system, and it will clear when it clears.

People with prepaid debit cards, however, who live on a much tighter cashflow model, can’t afford to just sit around waiting for their checks to clear. If the check in question is a paycheck, then they want — they need — that money now. Virtually all prepaid debit cards do everything they can to persuade people to convert their paper paycheck into an electronic direct deposit, which appears on the card immediately, but habits are hard to break, and there’s still a very strong consumer preference for being paid in some kind of physical form. And in any case, checks can come from many different sources, many of which would find it difficult or inconvenient to try to transfer the money electronically.

In the real world, check-cashing stores have sprung up in tens of thousands of locations to scratch this particular itch: take a check into the store, which is conveniently located and open late, and convert it directly into cash. Supermarkets are generally happy to offer the service too. Walmart, for instance, will do it for a flat fee of $3.

When you’re cashing a check in person, there’s a natural fraud-detection device — the human who’s handing over the greenbacks — which is hard to replicate in a mobile setting where everything is done through OCR algorithms. The overwhelming majority of check fraud is perpetrated by the depositor: if I try to deposit a bad check, or a check I’ve already deposited elsewhere, then I’m almost certainly doing so knowingly. It takes a certain amount of chutzpah to attempt that in person — much more than it does to attempt it by trying to put money onto a prepaid debit card.

Still, as check-cashing services have grown, a company called FIS has built up a substantial business by offering a service which allows check-cashers to outsource all of their fraud detection, and taking all that risk onto its own balance sheet. Send a check off to FIS, and it will happily — for a modest fee — turn that check into ready cash, and it’s pretty much agnostic as to whether that check comes from a check-cashing storefront, or a supermarket, or a phone app. There might be slightly more fraud coming from phones than from storefronts, but FIS is big and experienced enough to be able to cope with that and weed that fraud out.

As a result, underbanked Americans who want to turn their checks into immediate spendable money can now do so more easily than ever, directly from their phones — something which is even easier than going to a storefront. Providers of prepaid debit cards can now contract with FIS to turn mobile-uploaded checks into cash, and then can put that cash irrevocably onto their customers’ cards. If the check ends up bouncing, or otherwise being bad, that’s FIS’s problem: neither the customer nor the card provider loses any money. Everything is done through the prepaid card’s mobile app, which simply makes calls on FIS’s API.

And what if your prepaid card provider hasn’t signed up with FIS? No worry: another company, called InGo, is here to help. If you have a prepaid Visa card, you can download the InGo app and use that to upload your check; you can then deposit cash immediately onto the prepaid card of your choice. If you’re willing to wait 7 days, the service is free, but most customers choose to receive immediate funds; the fees there are 1% for payroll and government checks, or 4% for all other checks. Those fees are highly competitive with check-cashers. Not only is InGo more convenient than a corner store, it’s also cheaper.

Most encouragingly, the use of mRDC, because it keeps people out of check-cashing stores, might well cut down on the amount of payday lending. Check cashing per se is not a massive drain of funds for the underbanked, although it can add up over time. But when you regularly go to a store to cash your paycheck, and you know that store is willing to advance you money against that paycheck when it’s coming to you in a week’s time, then it becomes very tempting to get your money not immediately, as soon as you receive it, but rather in advance. And that’s where check cashing can become usurious payday lending.

It’s a depressing yet undeniable fact that paper checks aren’t going anywhere, in the US. Even as they’ve become obsolescent everywhere else, they’re still ubiquitous here — and that fact has been a serious obstacle to helping banking go fully mobile. But now that FIS and InGo are cashing checks straight onto prepaid debit cards, what used to be an obstacle can now become a competitive advantage. Prepaid can go overnight from being the place where you can’t deposit a check into your account, to being the easiest place to deposit a check into your account.

I’m hopeful that as part of this trend, check cashing will stop being a significant expense for the underbanked, and will instead be a way for mobile banking operators and the prepaid industry to compete with each other in terms of convenience. Already, if you’re a Gobank customer, and you deposit a check into your account, the money will arrive immediately — and Gobank won’t charge you a penny, at the margin. (Although they will surely hope that you will pay for it in another way, through your voluntary monthly fee.)

Most of the unbanked have smartphones, now — which means that smartphones should be able to disrupt check-cashing stores long before checks themselves become obsolete. That’s going to help take financial services for the underbanked out of the control of the payday-loan industry, and into the control of nimbler and more competitive mobile-native companies who are more interested in scale than they are in extracting rents from the poor. Which should be good for everybody.


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