## The Small Cash Market
Understanding Participants & Providers t o Avoid Unintended Consequences by Moebs $ervices, Inc.

Page 1 of 6

CFPB Overdraft Comments by Moebs $ervices Overdrafts are a significant segment of the Small Cash Market (SCM), but by no means the sole segment. In fact, although o verdrafts through financial institutions account for the largest dollar amount of revenues for providers, almost 3 times as many people use non

- bank providers for small cash needs. Fifty to sixty million people use other segments of the Small Cash Market versus the 15
M illion frequent users of o verdrafts through banks and credit unions. Viewing overdrafts within the context of the larger Small Cash Market has two benefits: 1) it underscores the alternatives frequent users of overdrafts will have to conten d w i t h if the traditional overdraft market is restricted and 2) it provides meaningful information on how the SCM values, measures and prices alternatives to overdrafts.

If the Consumer Financial Protection Bureau (CFPB) limits its review to traditional o verdr afts, it is focusing on only a small part of a much greater market. The CFPB is in a position to consider the much broader scope of the market and o verdrafts within that context. In that way, unintended consequences of a narrow perspective can be avoided

. Moebs $ervices comments are an attempt to begin defining this larger Small Cash Market so the ramifications of any changes to the o verdraft sector on the participants and providers of the broader marketplace can be taken into consideration and addressed. The objective is to ensure that the CFPB does not inadvertently and unintentionally damage a significant portion of the market, while not providing the support and guidance the CFPB intends. Participants deserve protection and providers deserve compensati on and

, without value judgments

, the entire Small Cash Market needs , at a minimum, to be acknowledged and defined

. At some point in their lives almost everyone participates in the Small Cash Market.
Whether it is cashing a pay check at a grocery store, borrowing money from friends, hocking jewelry to get quick cash...or overdrawing a checking account, almost everyone participates once or occasionally or frequently in the Small Cash Market

. Seventy

- five M illion people participate i n the Small Cash Market through over 100,000 providers including the 12 ,000+ banks and credit unions that
offer o verdraft services. If the Small Cash Market were consolidated into one bank, it would be the largest bank in the world in terms of people serv ed

. Small Cash Market

– Participants
Seventy

- five M illion people participate in the Small
Cash Market. There is no specific demographic profile. Young. Old. Single. Married or Partnered

. Doctors,

s tudents , s oldiers , tailors, janitors

, supervisors

... Everyone. What the participants all have in common

– is the need for cash and money services

, and their
credit scores.
Participants can be “Banked”, “UnderBanked” or
“UnBanked”.

The “ Banked” have checking and/or savings accounts
and use che c ks, debit car ds, ATMs, etc. to pay bills and
make financial transactions. Their participation in the Small Cash Market is primarily due to frequent use
of o verdrafts. The “UnderBanked” have checking or savings

accounts
, but have opted not to use a bank, thrift or

c redit union for some financial transactions, choosing
instead to use other sources in the Small Cash Market

, i.e., payday loans or money orders . The “UnBanked” do not have a checking account or savings account; they need check cashers and money
order issuers, along with payday lenders and pawn shops to meet their short term funding needs.
Participants in the Small Cash Market want or need cash for the same reason s anyone wants or needs cash: to pay bills, purchase goods and services

, survive or succeed. At some juncture needed or desired funds are
not available. And f

i n a n c i a l s u p p o r t may not be available. One thing the Banked, the UnderBanked and the
UnBanked who use the Small Cash Market extensively or exclusively have in common is they have no FICO

sco res or low FICO scores below 600

. Ergo...participation in the Small Cash Market...either intentionally or unintentionally. Either occasionally or frequently.

## The Small Cash Market
Understanding Participants & Providers t o Avoid Unintended Consequences by Moebs $ervices, Inc.

Page 2 of 6 Small Cash Market

- Providers

The S mall C ash M arket is represented by more than 100,000 providers !
Chartered financial institutions account for less than 20% of the providers. The supply side of the SCM is diverse and fragmented and providers can be described as providing Unsecured Services , Secured Services
and /or Money Service s

. Unsecured Service Providers

 Banks, Thrifts and Credit Unions : There are over 14,000 banks, thrifts and credit unions in the
United States ; approximately 12,000 provide retail checking accounts. T here are 134 M illion checking account users

– 60 M illion of whom overdraw, two

- thirds unintentiona l l y

. A pproximately 15 M illion of those who overdraw frequently overdraw their accounts 10 or more

times a year. Those who frequently overdraw are a definite segment of the Small Cash Market.

 Payday Lenders : Approximately 4,000 payday lenders operate in 37 states which allow payday lending. Traditionally brick and mortar shops provid e d more than payday loans (title loans, check cashing and money order issuing )

. I n the past ten years the internet has spawned both domestic and international providers of payday loan s . Now residents of the 13 states which disallow payday lending can still get payday loans. The market for Payday Lenders is approximately 19 M illion people

.

 Family : Difficult to quantify, this un documented segment of providers of cash nonetheless may involve upwards of 7 M illion people

. About 8% to 9% of all U.S. households are “Family providers”. The Family providers generally expect only repayment of fund s

.

 Friends : The “Friends” market is less than 20% of the “ Famil y ” market. The “ Friends ” market has as part of its definition the expectation of pay ba ck of funds plus something else

– either fee or bartering of services, i.e. a small a d v a n c e is paid back with car repair

. Secured Service Providers

 Pawn Shops : This form of secured lending has been around for centuries. There are over 2,500

P awn S hops in the United States. The major things pawned are jewelry or firearms. This is a fluid segment that includes approximately 30 M illion participants. Most Pawn Shops are regulated
under Truth

- In

- Lending, state usury laws and other lending regulations. While pawn shops charge
interest, the charge is not sufficient to cover the pawnbroker’s expenses and cost to carr y the pawned item. The average pawn is about $80 or 50% of street value. The Pawn Shop makes money
when its customers do not pay to get the pawned item returned (about 20%) and the pawnbroker
sell s it at street value or the customer sell s an item directly to the pawnbroker

.

 Title Lenders : Title Lenders are secured with a used vehicle or equipment

. Often offered in connection with payday loans becaus e these f u n d s are secured for higher risk consumers.

 Bail Bond s m e n : Approximately 1.2 M illion people

, or 40% of the 3 M illion people who need bail every year in the United States

, obtain the i r bail . Bail is usually 10% of the total bail amount determined by the court. This bail amount represents the bail bondsman’s fee. The actual bai l is secured by titles on vehicles and real estate. This is specialized enough that there are less than 2,000 bail bondmen in the United States.

 Tax Refund Providers : While small in relation to the other providers in the S mall C ash M arket

, provi ders of advances on tax refunds do provide

, on a seasonal basis

, a significant portion of money movement on a secured basis. The security comes from the government refunding overpayment of

taxes.

## The Small Cash Market
Understanding Participants & Providers t o Avoid Unintended Consequences by Moebs $ervices, Inc.

Page 3 of 6  Loan Shark : A very high level estimate places approxima tely 1 M illion people in this market . A
black market or underworld market

, these services are rendered outside the normal parameters of
the law

. Money Service Providers

 Convenience stores : There are over 17,000 convenience store providers in the U

. S. This is usually a 24/7 business. The convenience store dominates the money service business. Almost half of the money moved in the S mall C ash M arket is thru convenience stores. The major money service provided by 90% of the convenience stores is check c ashing. Money orders are popular with 67% doing this. Domestic and international transmission of money is done by 15% of convenience

stores

. The f

e e s for these money s e r v i c e s a r e significant for the convenience store.

 Grocery Stores : Ov er 6,000 grocery stores provide check cashing and money order services . The

g rocery store does this to e m p t y i t s c a s h r e g i s t e r s of excess currency and coin and t h u s reduce the
number of armor car visits t ak i n g money to depositories

.

 Currency Exchanges : There are a pproximately 8,000 c urrency e xchanges. Currency Exchanges provide many other money transactions from driving, fishing and hunting license s to secured and
unsecured a d v a n c e s

. These 1 2 providers in the Small Cash Market provide M illions of Americans access to financial services. While not an organized formal market

, these providers offer multiple services in a fractionalized but significant market place throughout the United States. They work with people who otherwise would not have access to the payment and f u n d s p r o v i d i n g systems in the United States.

Small Cash Market

- Characteristics
Identifying the participants and providers of the Small Cash Market leads t o the identification of several characteristics that fuse the Small Cash Market together. Collectively they define and identify a market unknown in a mapping sense

, but recognized by tens of M illions of consumers

. Characteristics of Small Cash Market part icipants range from the inexperienced to the careless, from the
unaware to those who are focused. From those in transition to those i n p l a c e

. Some are making deliberate choices to manage their financial wants and needs through the SCM while others a re making uninformed
choices.
What all participants in the S mall C ash M arket have in common are :

 L ow or no FICO scores : SCM participants have FICO scores less than 600 or they have no FICO
score. This is the basic common feature of all participants in the Small Cash Market.

 Limited or no checking : SCM p articipants have limited or no use of traditional checking outside of those Banked participants who are frequent users of traditional o verdrafts. They hold savings

account s more than che cking. Checking often is simply a vehicle to handle their paycheck or to obtain a payday loan. SCM participants are primarily the UnderBanked and UnBanked segments.

Characteristics o f Small Cash Market transactions reflect the characteristics of the par ticipants.

 Small dollar amount : The dollar amount of any transaction is small ranging from a few dollars to no more than $5,000.

 High volume : The volume of transactions is well into multiple B illions.

 High Losses : Losses are a function of the participants ’ l o w F I C O s c o r e s

.

 Paper based : Almost all transactions and notices are paper based. Little electronic t r a n s a c t i o n s

.

## The Small Cash Market
Understanding Participants & Providers t o Avoid Unintended Consequences by Moebs $ervices, Inc.

Page 4 of 6  Labor intensive : Because the market is paper based, it is labor intensive . Inefficient providers are
force d out of b usiness or must reduce the volume of transactions they can do because of higher cost and thus price.

 High Cost : Low technology, high manual processing, small ticket sizes and high transaction volume
all add to cost structure. These c osts ar e a friction to the market forcing the fee price higher to reflect these high costs

. Since labor is a large element in the SCM transaction, additional volume does not markedly reduce the cost of the transaction.

 Fee Based : Fees are the universal a n d p r e f e r r e d way the Small Cash Market measures value for

servic es rendered

. SCM transaction s are labor intense due to paper based and the higher risk from
lower FICO scores. Having a high cost for a low value item makes the price be a fee basis since the mathematics of a rate or yield (Annual Percentage Rate or APR) renders abnormally high APRs.
Fees are the common method o f comparison b y p a r t i c i p a n t s a n d p r o v i d e r s in the SCM

. Impacts of the Small Cash Market on Overdraft Considerations
Understanding the Small Cash Market provides an important context from which to review overdrafts for

two reasons:

1. Fifteen M illion consumers, those who use overdrafts 10 or more times a year, could be forced into alternative providers in the Small Cash Market if their access to overdrafts is restricted, and

2. The Small Cash Market’s approach to valuing, measuring, comparing and charging for its services provides important i nformation relative to the pricing of traditional overdrafts. Understanding Overdrafts Overdrafts are the key reason the 15 M illion Banked and UnderBanked frequent users of overdrafts are in
the Small Cash Market. The average checking accountholder’s pro pensity to overdraw has increased in the past decade due to the
decline in ”float” , the enormous increase in debit card usage, massive technological advances and a slumping economy

. In 2003, the elimination of cash in transit or “float” from the financial system began in earnest with the enactment of the Check Clearing for the 21 st Century Act ( Check 21 Act). At the same time Visa and

Ma sterCard debit card initiatives , started in 1979, were experiencing exponential growth

. L e g i s l a t i o n and technology came together

. Float dropped from $10 B illion a day on 70 B illion transactions in 2003 to $400

M illion a day on 110 B illion transactions in 2011

. Paper check usage in 2003 was 46.3%. In 2011 debit card usage was 43%.

The lack of float and increased debit card usage has made the time between initiating payment and
reduction of account balance almost non

- existent now. These two changes in the payment system are the primary structural reason s for increased overdrafts and the focus of consumer advocates, regulators and legislators o n overdrawn checking accounts. With 87% of checking account users not reconciling their checking accounts the probability the average consumer will overdraw is immeasurably increased. Prior to the Check 21 Act, the average checking accountholder could manage gaps in the deposit / payment cycle, relying on float as necessary with an
occasional o verdraft that was probably handled manually by their financial institution. Post Check 21, that balancing act is like treading water. The decline in free checking adds another consideration

. Checking accounts have never been a profitable business for financial institutions. Checking is the most costly of all financial services. The daily reconciliation and settlement process is labor intense and the cost of depository labor has risen sharply in the past 20 years. Yet the checking account is the primary service a household or small business uses. Free

## The Small Cash Market
Understanding Participants & Providers t o Avoid Unintended Consequences by Moebs $ervices, Inc.

Page 5 of 6 From 2011 Call Reports of Banks, Thrifts & Credit Unions

Net Interest Margin 2.52%
Fee Revenue 1.63% Expenses & Taxes 3.34%
Net Income 0.84% Sources: Call Reports & Moebs $ervices checking was introduced in the 1970s as a way to gain the primary household a nd small business service. The cost of free checking was subsidized by overdraft fee growth fueled by the structural changes of less float and more debit card usage.

Free check ing peaked in 2009 with 81.5% of all depositories who offer consumer checking o ffering free checking. In 2011, free checking is offered by 74.1% of all financial institutions . The providers of free checking differ. Only 34 % of m ega banks, those with $50 B illion or more in assets, currently offer free checking

, a decline from 100% in 2009. O ther banks offering free checking have decline d to 70.8%

. About
the same number of credit unions (78.6%) offer free checking as in 2009.
Free checking was subsidized financially by overdrafts especially by those who frequently overdraw.

The current usage of overdrafts especially by frequent users of overdrafts has fallen but not significantly. Float reduction, debit card growth, d e c l i n i n g free checking offerings, and the FDIC OD Guideline s a r e a l l
f a c t o r s i n t h e c h a n g i n g overdraft e n v i r o n m e n t

. What portion of frequent overdraft users h a s changed behavior and what portion has moved to other
sources of funds in the Small Cash Market is the qu estion

. How to reflect overdraft pricing is another question and it is beneficial to turn to other providers in the
Small Cash Market to review their p r i c i n g a p p r o a c h e s

. Understanding How Banks M ake M o ney The 2008 GAO Report on o verdrafts indicates $40 as the median overdraft balance at the end of the day settlement of accounts. Using $40 as a benchmark the following are the prices of funding the overdraft: Mega Bank charge $35, Community Banks charge $25, Credit Unions charge $ 25, and Payday Lenders charge $17.50. So the best deal is to get a free checking account and fund overdrafts with a Payday Loan.

This is why 26% more people take a payday loan then use overdrafts frequently at banks or credit unions.

It is a secret that should not be kept any longer: Depositories especially Main Street financial institutions
rel y on fee income to stay in the black.
The margin depositories make on interest today is not sufficient to

pay expenses

. The interest generated by loans, investments and deposits is not sufficient to pay for salaries and expenses, so banks and credit unions, especially Main Street institutions, have come to rely heavily on fee income to have net income. Net income is
necessary to generate c apital a t community banks and credit unions
since the se institutions, as opposed to m ega banks, have no access to capital markets since they are small in assets.

Main Street relies on o verdraft and other fees to keep it in the black.
Once this is recognized and accepted then the conversation can shift from caps and other restrictions to how to appropriately reflect value of services when they are small ticket, high volume and labor intensive.
A situation where volume does not necessarily reduce per item cost and “ Annual Percentage Rate ” renders any value statement meaningless and provides no meaningful basis for comparison of other options

– like
those in the Small Cash Market. Turning to the SCM, it is evident that this larger marketplace uses “fees” as its valu e denomination. “Fees” provide a way to value a service , measure it and compare it among multiple providers

– APR does not

. Risks and Unintended Consequences
By putting restrictions and caps on what responsible financial institutions , particularly Main St reet’s community banks and credit unions, can offer their accountholders, by disrupting the free market

## The Small Cash Market
Understanding Participants & Providers t o Avoid Unintended Consequences by Moebs $ervices, Inc.

Page 6 of 6 competition, by distorting check and debit processing, by interfering with pricing policies, by complicating the information process, regulation and le gislation can create a situation that disrupts a functioning

environment and leave the participants without a financial safety net and providers without an incentive to provide needed support.

 Consumers who use overdrafts to manage their finances will not change their behavior. 15 M illion

u sers could leave the traditional financial system and look to Small Cash Market providers outside of the traditional banking system.

 Over 700 Main Street institutio ns could be forced to close with the loss of over 50, 000 jobs if caps and limits on overdrafts are implemented

, according to Moebs modeling of the ramifications of proposed legi slation an d recommen dations

. First and Most Important Steps
While gathering more data and information on the Small Cash Market and the role of frequent overdrafts within that market, key steps can be identified to support participants and providers alike in the financial

institution sector

. Full and immediate notice and disclosure via all means available. Tran sparency. Opt

- In requirements,

o ptions for payment including rates, fees and balances. All of these are important steps for Main Street and

M e g a B a n k institutions to take . Most of Main Street is already moving in this direction.

Chec king account holders want the security of a safety net and their providers are there to provide it. Requiring more and better disclosures, clearer and more expeditious notification, options for payment and service and allowing market forces to set the o ve rdraft fee will avoid the unforeseen consequences of forcing frequent overdraft users into other areas of the Small Cash Market or adversely affecting financial institutions and their employees
In addition

, m o r e information can be gathered from the ways other areas in the Small Cash Market value
their services

– fees

– and how this value denomination will provide a clear measure that can be compared

across a l l providers

.

M o e b s $ e r v i c e s , I n c

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