In summary

California’s check-cashing regulations are costing consumers hundreds of millions of dollars a year.

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By Prasad Krishnamurthy, Special to CalMatters

Prasad Krishnamurthy is a professor of law at UC Berkeley School of Law where he teaches and writes about financial regulation and contracts.

Millions of Californians rely on check-cashing outlets to cash their paychecks and benefit checks. A family who earns $20,000 a year and utilizes a check-cashing outlet will pay fees up to $600 a year. 

This fee to cash checks is too high. 

The state currently caps the rate for cashing government and payroll checks at 3% of the face value of the check. Consumers should instead pay a much lower, flatter fee. To make up for the lost revenue, as in New York, each check-cashing outlet should be granted an exclusive license to operate in a designated geographic market. 

Understanding the case for lower prices and fewer stores requires a bit of textbook economics. 

Check cashers compete on both price and location. If left unregulated, such markets are characterized by too many stores, each operating at an inefficiently small scale, with a high average cost per customer. Stores then have to charge a higher price to their smaller customer base in order to break even. 

California’s price regulations arguably make the too-many-check-cashers problem even worse. Because of the 3% cap, some check cashers are no longer viable. But the remaining check cashers can now effectively collude on 3%. As a result, they can and do locate close to one another without the fear of driving down prices. 

In sum, California consumers don’t need three check cashers operating within a few blocks of one another, when instead they could have a single check casher charging a lower price. 

Speaking of price, the worst part of California’s check-cashing regulations is the 3% fee. Regulated prices should be related to costs, and there is no cost-justified basis for 3%. 

It is fair for check-cashing prices to be a percentage of check value if bad checks frequently have to be written off. However, evidence from a publicly listed company indicates that the percentage of write-offs from bad checks is only 0.3%, and this is an overstatement because it includes write-offs from personal checks. If write-offs are a small fraction of check value, then prices shouldn’t vary much with check size. 

This 0.3% figure implies that the expected losses from a $1,000 check is $3. Yet, under California law, the fee on a $1,000 check can be $30. This difference of $27 cannot be justified by costs and amounts to regulatory price gouging of many consumers cashing paychecks or benefit checks.   

A fair price menu would instead be relatively flat. For example, the fee for all payroll and benefit checks below $250 could be the greater of $2 or 2%. For checks greater than $250, the fee could then be $5 plus 0.3% of the amount by which the check exceeds $250. With this menu, cashing checks worth $100, $250, $500, $1,000, and $2,000 would cost a consumer $2, $5, $5.75, $7.25, and $10.25, respectively. A family making $20,000 a year would pay about $170 a year or 0.85% of their earnings in check-cashing fees. 

By comparison, Walmart cashes checks up to $1,000 for $4 (0.4%), which is $3.25 (45%) less than the proposed menu. Walmart also cashes checks over $1,000 for a maximum fee of $8. Walmart’s price menu demonstrates that a 3% fee is too high, especially for larger checks, and that large payroll and benefit checks have negligible write-off risk. 

Finally, as in New York, a fair price menu has to be paired with entry regulation. Check cashers should receive exclusive licenses to operate within specified geographic areas. The areas should be chosen so as to decrease the number of check-cashing outlets by at least one third. This will allow the existing stores to remain profitable by having a higher volume of customers. The existing economic evidence from New York shows clearly that consumers prefer cheaper prices to more stores.

California’s check-cashing regulations are costing consumers hundreds of millions of dollars a year. It’s time for lower fees and fewer stores. 

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Prasad Krishnamurthy has also written about ending legal abuse of borrowers by collection agencies and making applications to the University of California automatic.

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