Check cashing is a relatively simple business. An individual has a check made out to him. He may not have a bank account, may not want to wait for the check to clear, or may not be able to get to his own bank to get his money quickly. He presents the check to the check-cashing business. The check-cashing business verifies his identification, asks the client to endorse the check and gives him the amount of the check less a transaction fee. The business then deposits the check in its bank account. As simple as the business is, there are inherent risks and regulations that must be followed. Your small business may offer strictly check cashing services only, offer bill paying, money orders and payday loans in addition, or be part of another operation, such as inside a convenience store.
Licensing and Registration
The specific licensing and registration requirements are set state-by-state as well as federally. Check with the city offices where you plan to locate the check-cashing store as well. Federal regulations define a money service business, MSB, generally as a business which cashes, on a regular basis and for a fee, checks for more than $1,000 to any one individual per day. Also included as a money service business are those businesses which provide money orders, money transmission, currency exchanges and/or check cashing. Businesses must register, use approved bookkeeping methods, provide an agent list and report suspicious money-laundering activities. An agent is defined as the entity that is selling the money services at a location and may be a corporation, partnership or sole proprietor. The requirements are stringent and numerous. Obtaining the services of an attorney prevents problems with compliance. Many banks insist that you and your check-cashing business comply with the federal Bank Secrecy Act (BSA) and Patriot Act to bank with them.
Franchise or Independent
The operation can be part of a franchise of nationwide check cashing stores. The advantage is the cooperative advertising, training, management advice and software systems the franchisor offers. Customers may feel more comfortable going into a franchise they’ve seen in several other locations. An independent store doesn’t have to pay any initial fees or ongoing fees on sales, follow any procedures set down by the corporate franchisor, or be restricted by franchisor-approved advertising.
If your small business is part of a franchise, the franchisor may tell you what kind of checks you can cash. As an independent, you’ll have to make your own polices of what kind of checks you’ll accept — government, business, payroll, money orders, personal, out-of-state. Each type of check has its own level of risk. Government checks are relatively low risk while personal checks are relatively high risk. Decide how employees will handle checks from businesses that are new. You may require them to look up the business on the Internet, call the business or even go so far as confirm employment if it’s a payroll check. Determine what kind of identification you’ll require — government ID, state driver’s license, passport and company IDs are a few possibilities.
No matter how stringent your policies are, returned checks are part of doing business as a check-cashing company. Checks are returned for insufficient funds when presented to the bank, checks are written on closed accounts, a stop payment may have been issued and there can be deliberate fraud. How you handle returned checks is a policy decision you’ll have to make. Alternatives include re-depositing the check when funds are available by calling the bank, turning over the check to a collection agency or proceeding with legal action. Sharing the negative information with a national data system helps prevent further abuse by customers who intentionally write bad or fraudulent checks.
A check cashing business is high risk for robbery. It’s a given that there will be a large amount of cash on hand. Some franchisors are encouraging their franchisees to load a Visa, or other debit card, with the proceeds from the check. The customer then uses an ATM to withdraw the funds. The problem is that some banks limit the daily amount of cash that may be withdrawn with one ATM card. Clients may not trust the debit card when they expected cash. The debit card may not be accepted by individuals the client wants to pay. Bulletproof glass, 24-hour staffing, security systems and cameras help strengthen security. Verifying employee information through a third-party background check decreases the potential of fraud and robbery.