Financial Firms Fill Banks' Service Gaps

Eddie Oliviera provides financial service in a hurry.

"The person that needs the money needs it like a blood transfusion - immediately," says Mr. Oliviera, who runs an American Express Co. Money-Gram agency from his delicatessen in the New York City borough of Queens.

Some of his money-transfer customers have friends who need bail money. Others have a brother who gambled away bus fare in Atlantice City.

Exploiting Openings

Mr. Oliviera's partnership with American Express is but one example of how financial companies are rushing into businesses that banks have either abandoned or overlooked.

Another example: Western Union Financial Services in August formed a joint venture with Thomas Nix Distributor Inc., a check-cashing chain in southern California. The two are opening 20 check-cashing outlets under the Western Union name in and around San Francisco and expect to go nationwide within two years. It's easy to see why: An estimated $43 billion worth of checks were cashed at such outlets last year -- at fees ranging from 3% to 20%.

The profits can be equally good in money transfer. In July, American Express gleaned $4,000 in fees from customers who wired a total of $57,125 from Mr. Oliviera's store. On an annual basis, the company's fee income could amount to $48,000. An additional $12,000 or so would go to Mr. Oliviera.

And consider that American Express has recruited 11,000 MoneyGram agents nationwide since the service was launched two years ago. Already, Amex has garnered an estimated 10% of the nation's money-transfer market.

Should bankers take a closer look at the businesses of money transfer and check cashing? Perhaps so. Yet banks have spent heavily in recent years to defeat proposals that would force them to cash and process government-issued checks for free or for reduced fees.

A Burgeoning Field

This seems odd in light of the fact that check-cashing chains are burgeoning; profits appear to be on the rise; and at least one company has made a tidy sum by going public.

No official figures exist on growth, but the nation's Yellow Pages directories listed 4,189 check-cashing firms last year, more than double the number in 1985, analysts said. That's about one-third the number of banks in the country. The ratio is sure to narrow in coming years, as the number of banks shrinks toward 8,000.

All told, merchants collected about $750 million in fees for cashing checks last year, according to estimates from John P. Caskey, an economist at Swarthmore College. Those fees may seem small next to the $55 billion in fee income earned by the 12,150 FDIC-insured banks last year. But it would be a fillip in a time of need.

Some analysts also said that bankers should be concerned by recent studies showing that check-cashing customers -- even those who have bank accounts -- express increasing dissatisfaction with their banks.

Attracting Bank Customers

"We think some bank customers will come over to us as a matter of convenience," said Warren Bechtel, a spokesman for New Jersey-based Western Union.

The company is happy, however, to reinforce bankers' notion that serving lower-income consumers is an unprofitable, if not unseemly, business.

Listen to Edward J. Fuhrman, president of Western Union Financial, on the subject of money transfer: "We're not talking about a multibillion-dollar market. I don't know how that converts to the interest of banks."

Western Union, a profitable unit of the ailing New Valley Corp., last year netted $81 million while transmitting $6.9 billion for customers.

American Express' Perception

Isaac Lasky, a vice president at American Express' MoneyGram, contends that bankers are ignoring a growing population base to their own detriment.

"I think banks have stepped back from offering these services," Mr. Lasky said, noting that there are 25 million Hispanics in the United States and that this group is growing five times faster than others in the U.S. population.

Mr. Oliviera, the Queens deli owner, estimated that 60% of his money-transfer customers have no bank account. Three-quarters of them send money to Mexico.

Bankers would be wrong to assume that only poverty-stricken people use money-transfer and check-cashing services. American Express and Western Union estimated that the average household income of money transfer clients is $30,000 -- not wealthy but more than twice the household poverty level.

Bank of America's Bid

At least one major bank is starting to target the Hispanic population. The Bank of America unit of BankAmerica Corp. this summer introduced a money-transfer service aimed at Latinos who send money from California to Mexico.

"This will be a very lucrative business for us," predicted Ennio Quevedo-Garcia, vice president and manager of market segments at the bank.

Bank of America charges customers $30 for an initial transfer, and $20 for each additional transaction. Nonbank consumers pay a flat $35.

It introduced the service for "individuals who might not have banking relationships," Mr. Quevedo-Garcia said, but the bank also sees it as a way to attract customers to other services.

A wire-transfer customer who enters a branch is greeted with signs and brochures in Spanish advertising mortgages, checking accounts, and other products. "We see all segments of these markets as an investment in our future," Mr. Quevedo-Garcia said.

American Express has signed up a handful of small banks in California to act as money-transfer agents, fronting for the company just as they sell its travelers checks.

But few bankers are likely to forget the experience of Citicorp, which beat a rare retreat after trying for two years to compete with Western Union in money transfers.

The nation's biggest banking company started a national money-transfer service in 1986 with 2,500 agents. Western Union, by contrast, has 17,000 agents. Before dropping out of the business in 1988, Citicorp sued Western Union for $105 million, charging it with unfair practices that limited competition. It ultimately dropped the suit.

Western Union, meanwhile, is having its own difficulties. Its new check-cashing venture has drawn cries of foul from smaller check cashers that offer Western Union wire-transfer services.

Some say that Western Union is part of a gentrification movement that is challenging the image of the dingy street-corner outlet that charges exorbitant fees.

"A handful of stores have broken away from the commonly accepted mold," said Howard Mandlebaum, executive director of the National Check Cashers Association, a group founded in 1987. "They have clean storefronts, comfortable interiors, and do everything they can to sell more than service to a customer."

Few bankers are convinced.

Phillip Corwin, retail banking director of the American Bankers Association, pilloried "the rip-off rates that some of these places charge." Though check-cashing stores are state-regulated, he said, "it doesn't make any sense" for people to use them instead of low-cost bank accounts.

Fine words, but many low-income people have no choice. Only about 60% of banks in the country offer bare-bones checking accounts.

"Deregulation is the primary reason for our spectacular growth," said Gerald Goldman, general counsel of the National Check Cashers Association. He said the check-cashing business boomed during the Reagan administration, as deregulated banks closed branches in poor neighborhoods and raised fees.

Consumers have noticed.

Defections from Banks

A 1989 study done by the Roper Organization for the Consumer Bankers Association said 67% of customers who use check-cashing stores also had deposit accounts at a bank, thrift, or credit union.

Asked why they went to the check cashers -- which were within six blocks of bank branches -- 30% cited more convenient hours; 26% said service was faster; 24% cited location; and 17% said they couldn't wait for a check to clear.

"We have polled our customers and have discovered that some 67% actually have bank accounts," said Raymond Hemmig, chairman of Ace America's Cash Express, the nation's largest check-cashing chain.

Ace, which has 200 stores in Texas, Colorado, Louisiana, Maryland, and the District of Columbia, is widely viewed as the model of the new breed of check-cashing store. It was started in 1968 with a single outlet in Colorado. By 1988, when it had grown to a 90-branch operation, it was acquired by managers from Associates Corporation of North America in a leveraged buyout.

Its history has been paralleled in the Northeast by Pay-o-matic Inc., the only publicly traded check-cashing company in the nation. The Syosset, N.Y.-based chain went public 12 years ago when it had 30 stores in the New York City area. Today, it has 103 locations.

Clearly, if banks don't adapt to new consumer needs, other companies will.

PHOTO : MONEY TO GO: American Express MoneyGrams - right next to the milk and bread at Eddie Oliviera's store in Queens, N.Y.

PHOTO : CASHING IN: Ennio Quevedo-Garcia, top, vice president at Bank of America, which has begun a money-transfer service; Isaac Lasky, left, vice president for international MoneyGrams at American Express; and Edward Fuhrman, right, president of Western Union.

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