United States General Accounting Office 

Testimony 

For Release 

on Delivery 

Expected at 

1O:OO a.m. 

Wednesday 

May 18, 1988 

BANKING: Government Check Cashing Issues 

Statement of 

Richard L. Foqel 

Assistant Comptroller General 

General Government Programs 

Before the 

Subcommittee on Consumer Affairs 

Committee on Banking, Housing and 

Urban Affairs 

United States Senate 

(” e , .’ ., ! ‘> 

,.. ‘- ‘XI j,’ 53 JJ 

GAO/T-GGD-88-35 I 
Issues Related to Cashing 

Government Checks 

SUMMARY OF STATEMENT BY 

RICHARD L. FOGEL 

ASSISTANT COMPTROLLER GENERAL 

U.S. GENERAL ACCOUNTING OFFICE 

The Competitive Equality Banking Act of 1987 required that GAO 

study the extent to which individuals who receive Treasury checks 

have difficulty cashing such checks. GAO is testifying today on 

its preliminary results. 

The issue of access to check cashing services at depository 

institutions is a difficult, complex, and emotional one. 

Consumer advocacy groups and others believe low and moderate 

income consumers have difficulty cashing government checks. 

However, there is little statistically valid data to assess the 

extent or cause of difficulties, and there is no common 

agreement as to what is meant by difficulty. Nevertheless, some 

individuals do not have depository accounts and are not able to 

cash their checks at local banks or thrifts. Instead, they cash 

them at local facilities, such as check cashers or grocery 

stores, that may charge fees or require minimum purchases 

considered by some to be too high. 

Given the nature of check cashing complaints, it is clear that 

those without depository accounts experience the most problems. 

GAO analyzed the Census Bureau's Survey of Income and Program 

Participation and reviewed other studies to determine their 

characteristics. GAO found that the "unbanked" population of the 

United States is at the lower end of the income scale, relies 

heavily on government benefit programs, and includes a 

significant percentage of the unemployed. Reasons why 

individuals do not have accounts seem to center on cost and 

convenience. While special low-cost accounts for senior citizens 

are widespread, this is not so for the general population. Some 

individuals, however, 

than banks. 

may prefer to cash checks at places other 

GAO believes any solutions being considered to check cashing 

problems should be targeted to those truly experiencing 

difficulty cashing government checks. GAO suggests that 

concerned federal agencies study benefit delivery patterns and 

needs and recommend improvements, including lower-cost options. 
Mr. Chairman and Members of the Subcommittee: 

We are pleased to be here today to participate in your hearings 

on check cashing difficulties experienced by those without 

banking accounts. Section 1001 of the Competitive Equality 

Banking Act of 1987 required GAO to study the extent to which 

individuals who receive Treasury checks have difficulty cashing 

them. The results of this work to date form the basis for our 

testimony today. 

The issue of access to check cashing services is a difficult one. 

Consumer advocacy groups and others have expressed concerns about 

the inability of many low and moderate income consumers to cash 

government checks at banking institutions. But there is Little 

statistically valid data that can be used to evaluate the extent 

or cause of check cashing difficulties that individuals may be 

experiencing. 

Indeed, there is no common agreement on what is meant by 

"difficulty." Without a clear delineation of the problem, it 

will be hard to decide what actions are most appropriate. In 

addition, should steps be taken to improve the ability of those 

with low and moderate incomes to cash checks at banking or other 

facilities, a decision is needed on who will bear the costs of 

such improved access--the government, the recipients of checks, 

or the institutions cashing the checks. 
My testimony today is divided into two parts. First I want to 

summarize some of the information that we have gathered in the 

course of doing our review. Then I shall present our preliminary 

observations on the dilemma that is posed in searching for a 

federal response to check cashing problems. 

RESULTS OF GAO'S SURVEY 

Our survey of check cashing problems began in September 1987. In 

doing the work we (1) analyzed Census Bureau data to determine 

the characteristics of families receiving government benefit 

checks who might be experiencing problems; (2) reviewed certain 

state and local government arrangements designed to facilitate 

check cashing by those without bank accounts; (3) reviewed and 

evaluated available studies related to the issue of check cashing 

difficulty; and (4) had numerous discussions with bank regulatory 

agencies, other federal agencies, state and local officials, and 

consumer and industry groups. 

While our mandate was to study difficulties cashing U.S. Treasury 

checks, we decided to include state and local government checks, 

as well. We determined that those advocating change make little 

distinction between problems in cashing federal, state, or local 

government checks. In our opinion, recipients of state and 

local government benefit checks are more likely to be 

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experiencing problems than those receiving U.S. Treasury benefit 

checks. Our survey of the issue covered three basic areas: 

-- The extent to which banks and thrifts cash government checks 

for nondepositors and reasons why they may not. 

-- The characteristics of those experiencing problems and why 

they do not have accounts at banking institutions. 

-- Governmental responses to facilitate the delivery and cashing 

of government checks. 

CHECK CASHING EXPERIENCE AT 

DEPOSITORY INSTITUTIONS 

In 1986, we made a nationwide statistically valid survey of fees 

charged by banks and thrifts for checking account and other 

services. Among other things, we found that as of mid-1985 

about 86 percent of banks and 55 percent of thrifts cashed U.S. 

Treasury checks for nondepositors. Of that total, nearly 56 

percent of banks and 84 percent of thrifts cashed the Treasury 

checks free of charge. For those that charged for the service, 

the median fee was $2.00. 

Studies conducted by consumer groups reveal different, though 

not necessarily contradictory results. According to the 

Association of Community Organizations for Reform Now, Only 12 

3 
percent of the institutions they surveyed cashed checks for 

non-account holders in 1986. A Consumer Federation of America 

estimate was 29 percent in 1987. The institutions surveyed by 

these two organizations were not -randomly selected and were 

predominately located in urban areas. Survey results by another 

organization and interviews reveal that access to check cashing 

services at depository institutions by non-account holders is 

much more limited in urban than in rural areas. Unfortunately, 

there is no current, nationally representative survey of the 

check cashing experience of non-account holders at depository 

institutions. Nonetheless, it is our impression that access is 

considerably more of a problem in urban locations than in rural 

ones. 

Banks which do not cash government checks for nondepositors cite 

three principal reasons for their opposition to being required to 

do so. These include (1) unreimbursed cost if there were a 

requirement that such checks be cashed free of charge, (2) 

congestion of their facilities, and (3) potential fraud. 

Banks believe that any efforts to expand access of nondepositors 

to check cashing services must involve compensation for the costs 

they would incur. But, we could find no definitive estimate of 

how much it costs to cash a government check. The Federal 

Reserve's 1986 Functional Cost Analysis survey found that the 

COSt Of processing a check is from $.28 to $.33, but the costs 

included are not specified. A small bank in Florida provided us 

4 
with an estimate of $.66 per check, which also was not all 

inclusive. Other estimates range up to $5.00. 

None of these estimates appear to quantify the cost of lost 

business due to congestion of lobbies --a reason frequently cited 

by institutions for refusing to cash checks for nondepositors. 

Bankers indicated that large numbers of individuals in lobbies 2 

or 3 days a month strained labor and capital resources, resulting 

in poor service to regular bank customers who pay for those 

services. Consumer advocacy groups can counter that if more 

banks cashed checks for nondepositors, the few banks that now do 

would not experience the congestion problems they currently have. 

As for fraud, we found the actual dollar amount Treasury 

reclaims from banks and thrifts or refuses payment on to be 

smaller than the claims of banking groups imply. (The aggregate 

data do not, of course, reflect local or regional differences.) 

Past levels of fraud, however, may not be a guide if free 

government check cashing for nondepositors is mandated. 

In FY 1987, some 559 million federal checks were issued, 

totaling $621.6 billion. In FY 1987, Treasury reclaimed or 

refused payment on 142,632 checks valued at $63.7 million. Of 

these checks, about 92,000 valued at $38.9 million were issued to 

deceased payees. These data do not accurately depict bank losses 
from Treasury reclamations or declamations because banks are able 

to collect some of the amounts reclaimed. 

We have not been able to obtain estimates of the percentage of 

funds banks are able to recapture (or at what cost) from 

accounts, or from businesses or persons who cashed the checks. 

We do not have comparable data for fraud levels for state and 

local government checks. 

WHO IS HAVING PROBLEMS? 

Given the nature of the complaints about check cashing problems, 

it is clear that those without banking relationships are the most 

likely to be experiencing the most difficulty. To determine the 

characteristics of this group we relied primarily on data 

obtained in the Census Bureau's Survey of Income and Program 

Participation. This survey is nationally projectable, is 

collected from about 20,800 households nationwide, and includes 

data on participants in federal, state, and local programs that 

disburse benefits. It also contains information on whether or 

not these participants maintain bank accounts. 

Census data indicate that there were about 92 million family 

units appropriate for our study in the United States in 1984. 

These data were the latest that were available for our analysis. 

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About 18 percent of these families did not have bank accounts. 

of these 16.6 million families: 

-- 4.3 million or 26 percent received Treasury checks, and 3 

million or 18 percent received state or local government 

checks; 

-- the number of unbanked families receiving at least one 

government check was 7 million, or 42 percent of all unbanked 

families: and 

-- 82 percent of families without bank accounts had an income 

under $20,000, and 80 percent were headed by individuals with 

12 years of education or less. 

If individual government programs are examined, Aid to Families 

With Dependent Children (AFDC) and general assistance have the 

highest percentage of unbanked families--78 and 77 percent, 

respectively. These checks are issued by state or local 

governments. About 15 percent of families receiving Social 

Security checks and 50 percent of those receiving Supplemental 

Security Income checks were unbanked. 

Thus, the unbanked population of the United States is at the 

lower end of the income scale, relies relatively heavily on 

7 
government benefit programs, includes a significant percentage of 

the unemployed, and most have 12 years or less of education. 

In light of the data on bank po13cies on cashing checks for 

nondepositors and claims about the problems they pose, we sought 

to understand why individuals do not have bank accounts. We had 

discussions with individuals and consumer group representatives 

and reviewed studies on the check cashing experience of 

individuals. principal reasons given as to why individuals do 

not have bank accounts were (1) banks do not meet all the needs 

of certain individuals for several reasons, and (2) some 

individuals prefer to use non-bank check cashing facilities. 

Check cashing facilities were perceived by some to be more 

convenient in their hours and locations. For example, they were 

open when banks were not. Others thought bank accounts did not 

seem necessary, given the limited number of transactions they 

made. Reasons for not dealing with banks also included high 

opening and minimum balance requirements, a credit card 

requirement to open an account, delayed access to funds, and lack 

of bilingual materials and personnel. we also heard that fear of 

losing welfare benefits also kept some ind iv iduals from open inq 

accounts. 

I would like to elaborate on two of the principal reasons for 

not maintaining bank accounts: inconvenience and cost. 

8 
Inconvenience 

A survey by the New Jersey Department of the Public Advocate 

sheds some light on this consideration. The New Jersey study 

team reviewed 4,842 cancelled AFDC checks and found that 47 

percent were cashed at banks: 32 percent at check cashing 

facilities; 9 percent through friends, relatives, and landlords; 

and 12 percent at grocery stores, taverns, liquor stores, and 

other locations. The department also interviewed 750 individuals 

outside 29 licensed check cashing stores and found that about 50 

percent of the responses of those cashing government checks 

indicated that banks were inconvenient. These inconveniences 

included long lines at those few banks that did cash checks for 

nondepositors, receipt of checks on days when banks were closed, 

and the observation that few banks issue food stamps while many 

check cashers do. 

cost 

Let me now address the cost issue by providing some comparative 

data on check cashing facilities and banks. check cashing 

facilities operate in a number of states. An official of the 

National Check Cashing Association estimates that between 2,000 

and 3,000 operate nationwide. As far as we have been able to 

determine, these facilities are regulated with regard to the fees 

they charge in only three states. Regulated maximum fees are: 

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New York: .75 percent of face value plus 10 cents. 

New Jersey: 1.0 percent of face value for in-state 

checks and 1.5 percent for out-of-state checks up to 

a maximum of $8.00. 

Illinois: 1.2 percent of face value plus 90 cents. 

Thus, in these states the cost to an individual wanting to cash a 

$411.45 check, the average Social Security check in November 

1987, would range from $3.19 to $6.17. In other states we have 

been told that fees can be as high as 10 percent of the face 

amount of a check. A survey of check cashers found a high of 5 

percent Of the face value of a government check, or $20.57 in 

one state. 

GAO's 1986 national survey of bank fees revealed that, as of mid1985, special low-cost accounts were being offered by banks and 

thrifts to senior citizens (74 percent), students (41 percent) 

and minors (23 percent). But only 15 percent offered "no-frills" 

accounts to the general public and they were not all appropriate 

for the poor. For example, some required high opening balances. 

Our calculations indicated that the cost to maintain such a "no 

frills" account for a consumer with an income of under $10,000 

who wrote eight checks per month and maintained a balance of 

about $260 in the account would vary considerably. For 37 

percent of these customers there would have been no cost, 29 

10 
percent would have paid between $3.00 and $4.00, a month and 9 

percent would have paid over $5.00 to $10.00 a month. 

The cost of maintaining a checki 

less than that of using a check 

convenience of check cashing fat 

very important consideration. Certain studies that have been 

done indicate that cultural attitudes such as a basic distrust of 

banks 

ident 

role. 

, illiteracy, and an inabil ity to maintain sufficient 

ification to meet bank requ irements also seem to play a 

ng account at some banks may be 

cashing facility. But the 

ilities also appears to be a 

GOVERNMENTAL RESPONSES 

Over the past several years, there have been federal as well as 

certain state and local government responses that address both 

the affordability of basic banking services and the cashing of 

government checks. 

In 1986, the Federal Financial Institutions Examination Council 

issued a joint policy statement that encouraged the offering of 

inexpensive basic banking accounts, including check cashing 

privileges. And a number of states have taken actions to 

require low-cost banking services. For example, Massachusetts 

requires free checking or savings accounts for those 65 and older 

and 18 and younger, and it also requires banks and thrifts to 

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cash certain checks presented by resident pensioners or retirees 

if they provide adequate identification; are registered with the 

institution; and the check is a federal, state, or local 

government retirement, social security or supplemental security 

income check. 

Connecticut will soon require banking institutions to cash state 

checks issued to recipients of public assistance without charge 

to the recipient. However, the institution may request a fee 

from the state for cashing such checks. We understand the state 

limited the free check cashing requirement to state public 

assistance recipients because it did not believe federal check 

recipients were having problems. 

some efforts have been made to facilitate the delivery of 

payments as well as share the costs of check cashing services. 

In New York City, under an arrangement with a bank, funds for 

welfare payments are sent to agents, primarily check cashing 

facilities. Recipients of the payments use magnetic cards issued 

by the city to establish their identity and the amount due them. 

They are then given the full amount of their welfare payment. 

New York City bears the cost. In Ohio, the state has contracted 

with banks that clear its state warrants (checks) or hold state 

funds to cash the warrants, including AFDC warrants. In one Ohio 

county, banks agreed with the welfare department to cash 

warrants (checks) for nondepositors. 

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State and local governments maintain accounts at banks used, 

among other reasons, to make public assistance payments. The 

Uniform Commercial Code requires a bank to cash checks drawn on 

that bank when presented over the counter for payment, 

regardless of whether or not the presenter has an account. The 

bank may take appropriate steps to ensure that the check is 

authentic and the presenter is the payee. 

OBSERVATIONSON 

PROPOSED APPROACHES TO CHECK 

CASHING PROBLEMS 

You asked us to comment on S. 2110, which proposes that banks 

cash government checks free of charge for nondepositors. There 

are not sufficient data to accurately measure the scope or 

severity of problems individuals without bank accounts are 

experiencing cashing government checks. And, without that data 

it is hard to decide whether S. 2110 or an alternative approach 

is most appropriate. 

The requirement contained in S. 2110 would give those not 

currently using banks to cash their checks the option to do so. 

Unknown, however, is the extent to which that option would be 

exercised. While free check cashing would certainly lower the 

direct costs to those who currently use check cashing facilities 

or other nonbank means of cashing checks, it appears from our 

work that the current preferences and needs of portions of the 

13 
unbanked population are based on other considerations besides 

comparative cost. 

S. 2110 would also place sole responsi 

institutions for bearing the costs of 

is perceived to exist. If it is belie 

public assistance should not bear the 

bility on banking 

relieving the problem that 

ved that beneficiaries of 

cost of cashing government 

checks, consideration should also be given to governmental 

acceptance of part or all of the costs of cashing public 

assistance checks, as has occurred in certain instances at the 

local level. 

Mandated free checking is not the only way being proposed to 

improve individuals' access to government benefits. Electronic 

Funds Transfer (EFT), for example, has been cited as a way to 

solve check cashing problems by bringing more government check 

recipients into the banking system. Desirable features cited 

include eliminating problems of check forgeries and long lines 

at banks and recipients' difficulties when checks are stolen. 

Individuals would also obtain additional benefits. Use of EFT 

would also lower government costs, 

While in general we encourage the use of EFT, it should not be 

required for recipients of government benefit checks until 

genuine low-cost basic banking accounts with low opening 

balances are wide ly ava ilable to the public. Even if such 

14 
services do become widely available, there still could be 

questions about whether requiring EFT would represent an 

unwarranted interference with the preferences of those who do 

not want to have bank accounts. other suggestions include use of 

EFT with debit cards. 

We believe that the solution being sought should be targeted on 

those who are truly experiencing check cashing difficulties and 

that efforts to minimize the cost should be intensified. It 

might be worthwhile for the Congress to direct the Departments of 

Health and Human Services, Agriculture (for the food stamp 

program) , and Treasury, in consultation with the banking 

regulators, state and local governments, and banking and 

consumer groups, to assess current benefit delivery patterns and 

the difficulties and needs of those receiving such benefits. 

Even if changes to improve delivery and to lower costs 

recommended by the study are implemented, there will still be 

costs associated with making cash payments available. study 

results could help the Congress decide how to most equitably 

distribute those costs. Nevertheless, a public policy decision 

as to who should bear the costs remains. 

That concludes my prepared statement. We would be pleased to 

answer questions. 

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