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Tuesday, March 15, 2011

Ka-ching! ka-ching! Checking the cheque-cashers

In response to a letter of concern from the Homeless Coalition, the Communities and Neighbourhoods Committee requests city staff to bring back some information and investigate some alternatives to payday loans and cheque-cashing businesses.

I was intrigued by an article in Saturday’s London Free Press regarding payday loans and cheque-cashing machines. Although I had seen the letter from the Homeless Coalition on the Community and Neighbourhoods Committee (CNC) agenda last week, I hadn’t attended that part of the meeting because of a scheduling conflict. I was, however, able to obtain additional information from some who were there.

The letter, carbon copied to the committee, was addressed to Tim Best, owner of the Friday Night Lights bar and restaurant, asking him to consider the impact of his recently opened cheque-cashing business in the Market Tower building owned by his landlord, Shmuel Farhi. The Market Tower is the location of social services and Ontario Works (OW), thereby attracting many social assistance recipients.

The letter caught the attention of committee member Matt Brown (Ward 8) who wanted some information about the nature of these businesses. 

According to the General Manager of Community Services, Ross Fair, whose office is located in the Market Tower, his discussions with Best revealed that the business at that location is primarily a model for marketing these businesses to potential purchasers.  Best claims that in the two months since his business opened, no OW cheque has been cashed. Payday loans are restricted to customers whose monthly incomes are at least $1,500 per month. This excludes the vast majority of OW recipients.

This is not to suggest that payday loans and cheque-cashing businesses are not of concern in London. A new Western Union franchise recently opened in the area and seems to be doing a brisk business. However, as Fair pointed out, that doesn’t mean its clients are on social assistance. They are people who either don’t have or don’t wish to use bank accounts for a variety of reasons- garnisheed wages, bankruptcy, illegal transactions, etc.

Cheque-cashing and payday loans are expensive. Although the provincial Pay Day Loans Act limits the interest rate to 21%, not unlike that on a credit card yearly rate, the time period for payday loans is usually much shorter, more like a day or two. Cheque-cashing charges may run from 2% to 30% of the cash value. As Ward 4 Councillor Steve Orser, who has seen too many of these in his ward, pointed out, that money would be better going for food rather than to these companies.

Unfortunately, Orser seems to overestimate what the food dollar can buy, suggesting that with $50 a single mother could feed her four children for a week. Perhaps he should take a look at the report from the Middlesex London Health Unit issued last year which details the cost of nutritious food. The May 2010 report revealed that $50 would barely feed one young adult male or two small children for a week.

Nonetheless, his point is well taken. Low income individuals and families need every dollar they get just to survive.

London is not the first community to have expressed concerns about the predatory nature of cheque-cashing businesses. Last year, a councillor in Oshawa requested similar information. There, the staff report indicated that 29% of the Ontario Works clients used cheque-cashing outlets, rather than banks. Nearly 70% of recipients used direct deposit to their bank accounts thereby avoiding any charges.

But not everyone has a bank account. Although the proportion of the general population which doesn't is very low- less than two per cent- among low-income individuals that rises to eight per cent. And while banks have become less formal and intimidating, many low income individuals share Stephen Leacock’s perspective on banks in My Financial Career. When they go into a bank, they “get rattled.” They feel stigmatized and disrespected. It’s not a welcoming place for everyone, especially not for welfare recipients for whom the standard requirement of two pieces of identification may be difficult. Driver’s licences are not common among those who don’t own cars. 

The other more compelling reason for not using a bank is that banks won’t cash the cheque early; you have to wait. If you are trying to survive on $585 a month, that will be difficult. Cheque-cashing places will cash your government-issued cheque a day or two ahead of time, for a fee. The Oshawa research found that half of the 29% who used these facilities cashed their cheques early for an average fee of 3.5 per cent of the value, or about $20.50. A bit higher than the $1.50 charged on debit cards for some transactions for most of us or the interest on a cash advance on our credit cards.

The city of Toronto is investigating the use of smart cards for issuing social assistance payments, replacing welfare cheques with reloadable electronic cards similar to debit cards. Currently, as in London, those clients who do not have direct deposit have cheques mailed to their homes or, for those whose living accommodations are tenuous, picked up at the OW office. Electronically reloaded cards would assure on time payments and no payments lost in the mail or intercepted by a third party. A pilot project in Alberta in 2006 received a very positive response from recipients.

That option will also be explored by our city administration if the motion made by Brown is supported by council next Monday. At his suggestion, CNC recommended that staff prepare a report on the number and location of payday loans and cheque-cashing establishments, the services provided and the variable rates charged, how recipients of social assistance can be educated about the costs of these services, the prospects for getting provincial support for banning fees for cashing OW cheques, and the potential for the use of electronic “debit” cards as an alternative to mailed cheques.

A report of this nature will be very welcome. Too many of us have no idea of the reality faced by those living on the margins of society.  A smart card could reduce the stigma of the welfare cheque, avoid unnecessary trips downtown or to the bank, and eliminate cheque-cashing fees.

Smart cards, however, will not solve the problem of not enough money at the end of the month, keeping people trapped in a prison of poverty, debt and despair. For that, we need to look to higher levels of government.


Chris D. said...

These cash stores offer, among other things, cash before payday which locks many into an endless cycle of loans. They borrow money on their next pay bacause they are short of cash. The customer provides a post dated cheque for their next pay. This includes a huge interest rate for borrowing. When they pay that they are short again and it starts again.

Many people do not have bank accounts for a variety of reasons. They can cash their cheques at the cash store leaving a good chunk of their cheque there in order to get cash. This leaves them short on their month.

People can also sell their tax refunds and HST or GST cheques again for a substantial interest.

These stores tend to cater (prey) on those that can least afford to lose any more money.

Some of it can be put on the cassh store customer and soe of it on the cash stores and their intereest rates.

It does make some sense to have a reloadable card so people can heve access to their whole cheque.

Some solutions would be for Social Services to offer Credit Counselling to forestall some of the problems. Government can offer some programs to force banks to allow some of these people to get bank accounts.

There is no one solution to the problem, but having a cash store near Social Service offices certainly puts the easy solution within reach of those who should not be availing themselves of it.

Roderic Brawn said...

Can anyone imagine why someone like Tim Best would be involved in such an enterprise?

Chris D. said...

@Roderic Brawn-- "Because it is lucrative"

Sheryl Rooth said...

There's nothing illegal about them Roderic. It's an enterprise. No different than having a bar or a restaurant or a clothing shop.
Gina, this was so well written (as always). Thank you for sharing another perspective on the issue. I have a family of four and there's no way I could feed them on $50 a week and give them three healthy meals a day. Even being exceptionally frugal.