Fourteen
Maximizing Share of Wallet
LAS VEGAS, OCTOBER 2008
Tim Thomas, the owner of Daddy’s Money Pawn Shop in Wichita, could not really say why he flew from Kansas to Las Vegas for the twentieth annual check cashers’ meeting. Around us the ambitious scurried about, dreaming of new markets to conquer, but Thomas was content with the way things were. “I’ve got a good manager so basically my time is mine,” he said. Thomas typically shows up at his shop mid-morning. He inspects the previous day’s receipts, does a quick scan of the books, and makes up the day’s lunch schedule. Except for tax season, that’s his workday, pretty much over just two hours after it starts. Sometimes he goes to the health club to work out but mainly, Thomas said, “I play a lot of golf.”
Thomas, who was fifty-four when we met in the fall of 2008, didn’t choose the poverty business as his path to Easy Street so much as it chose him. He was in his mid-thirties and working a route for a vending machine supplier when a childhood friend asked him to help him open a pawnshop in Wichita. That didn’t quite work out as either had hoped but a new world had been opened to Thomas, and in short order he was managing a rival pawnshop doing a robust business cashing people’s checks and making payday loans. In 1999, after eight years of working for someone else, he opened Daddy’s Money. It too would be a full-service financial center making pawn loans but also handling a range of low-denomination financial interactions. What started out as a modest-sized, 1,500-square-foot shop is today an 8,000-square-foot superstore employing a staff of ten.
Daddy’s Money faces stiff competition. A partial list of rivals within the Wichita city limits includes A-OK Pawn, the Pawn Shop, King’s Pawn, Cash Inn, Money Town, A Loan at Last, Aces’ Pawn, Air Capital Pawn Shop, Cash Inn Pawn, C&C Pawn Shop, Country Pawn, Easy Money Pawn Shop, Mr. Pawn, and Sheldon’s Pawnshop. But apparently even in the country’s fifty-first most populous city, with 350,000 residents, there’s more than enough business to go around. Daddy’s Money, Thomas acknowledged, turns a handsome profit.
“I’m making a lot of money,” he said shaking his head, as if he were as astonished as the next guy over his good fortune.
For months I had talked with poverty industry pioneers who had portrayed what they did for a living as noble. To hear them tell it, it was never about the money but instead about helping people and providing a valuable service. But Thomas didn’t reach for the high moral plane when describing how he made a living. That became immediately clear once he started talking about his various businesses, starting with check cashing. Check cashing generates only a few thousand dollars in fees per month, accounting for a small sliver of Daddy’s Money’s revenues, but it’s also a lucrative piece.
Kansas is one of seventeen or so states where there’s no cap on the fees a check-cashing establishment can charge. Thomas takes a relatively small portion (2 percent) when a customer presents a payroll check but a high one (10 percent) if it’s a handwritten personal check. On the surface that makes sense. Cashing a handwritten check seems far riskier than cashing one issued by an established business. But Thomas has removed almost all the risk inherent in the transaction before a clerk slides over any money. By that point, an employee has spoken to both the person who has written the check, to verify that it’s good, and to the bank, to make sure the funds are available.
Why, then, does he still take one-tenth of the face value of a check given the improbability that it will bounce?
“Because I can,” Thomas said with an amiable smile. “Other states have their rules but in Kansas I can charge as much as I want. It’s part of the game you play.”
Playing the game means taking whatever nips Thomas can from every check cashed inside his store. People who don’t have a bank account must pay their gas and electric and cable bills in person, using cash, or they must pay someone like Thomas to pay the bills for them—at $2 per bill. He has also partnered with Western Union for those customers, immigrants especially, who want to wire money overseas. But Thomas didn’t use a word as genteel as “partner.” Western Union pays him a “kickback,” Thomas said, every time a customer made a wire transfer, just as he earned a “kickback” each time he sold one of the prepaid debit cards he peddles for a subsidiary of American Express.
“If I sell a card for $10.95, I get $5,” he said. “Every time they swipe a card to make a purchase, something like a nickel or a dime or maybe a quarter kicks back to me”—depending on how much one of his customers spends on a transaction.
Cash advances represent another healthy source of Thomas’s revenues. In most other states where payday loans are offered, customers can’t take out back-to-back loans indefinitely but in Kansas they can. That cuts both ways, Thomas said. It’s great for the bottom line if a customer simply pays another 15 percent commission every other week for months at a time before paying back a loan. The flip side is that there’s nothing in the law to stop that customer from taking out a second or a third loan. Thomas imagines the customer who borrows $500, the maximum allowed under Kansas law. “That loan is costing him $75 every two weeks,” Thomas said. That might not sound like much, he said, but $150 a month can swamp, say, the home health-care worker earning $8 an hour and taking home $1,000 per month.
“If one month he has trouble keeping up with his payments, he’ll take out a second payday loan and then a third,” he said. “After a while that’s self-defeating. They’re looming on bankruptcy and they just don’t know it. And I’m not getting paid.” Defaults eat up roughly one-fifth of his payday revenues—more or less the same number that the big chains report.
In the payday business, September and December are typically the best months of the year because of back-to-school and the holidays. But Thomas is also in the tax preparation business; that means January and February are the most lucrative for Daddy’s Money.
Almost every enterprise that’s part of the fringe economy takes a stab at the tax return business. That’s something that Fesum Ogbazion griped about when we spoke in Dayton: all those pawnshops and check casher operations and even used car lots encroaching on his turf. Tim Thomas’s experience at Daddy’s Money shows why so many take the plunge. Thomas charges $65 for every return he fills out—good compensation, he said, for a job that typically takes him less than an hour. And while that’s the end of the work he must do, that’s just the start of the ways in which he is remunerated for his efforts.
The pages of Cheklist, the monthly magazine of the check-cashing industry, are marbled with the ads of companies pitching their services as a no-fuss way of making money in the tax business. Refund Today (“NO Tax Knowledge Necessary”), for instance, offers a product it calls “EZ Refund”: Pay nothing out of pocket, its ad reads, and we provide the software you’ll need and also the back office support. That means they take care of everything from electronically filing the completed tax return with the IRS to arranging the loan terms for those seeking a rapid refund. Under Thomas’s deal, he earns $6 for every client who opts for a refund anticipation loan (most do, he said) and then at the end of the season receives a bonus check based on the volume of his RAL business. In recent years, that’s meant an extra $2,000 to $3,000 in revenues.
The refund anticipation loan pays off in two additional ways. There’s the extra check-cashing fees he earns from those who invariably choose to cash a check on the spot and also the corresponding boost in pawn sales. Because of the earned income tax credit, the tax season is the one time each year that many of the working poor feel rich, and his pawnshop is a bargain hunter’s dream, a veritable warehouse crammed with flat-screen TVs, jewelry, video cameras, video games, and power tools—“everything except firearms,” Thomas said. Not surprisingly, he said, the first two months of the year are his best on the pawn side of the business, which accounts for around half his revenues.
In other environments, Thomas might seem covetous. But here in Las Vegas, surrounded by fresh-scrubbed junior executives in shirts stamped with the names of some of the country’s largest Poverty, Inc. brands, he comes across as the last modest man. He knows he could make a lot more money if he opened a second or a third store but then that would mean spending his days bouncing between stores and constantly fretting over new hires. Besides, what would he do with that extra money? “I’m not a greedy individual,” he said. “I’m fine with the one store.”
Modest” is not a term anyone would use to describe the ambitions of a thirty-two-year-old junior mogul named Fraser MacKechnie. MacKechnie is the chief operating officer of Amscot Financial, a family-run, all-purpose Poverty, Inc. enterprise (check cashing, payday loans, tax prep, money orders, prepaid credit cards) with more than 170 stores and 2,300 employees stretched across thirteen counties in central Florida. A tall, thin man with a wedge of blond hair, MacKechnie was featured in a panel discussion (“Marketing Strategies That Improve Perception and Profit”) I attended on the first morning of the check cashers’ convention. He spent thirty minutes sharing the tricks and tips that he, his father, and his brother have learned in operating what is widely considered one of the better run and more successful regional powerhouses.
MacKechnie began by stressing the “all-important” issue of “curb appeal.” Aim to look like a McDonald’s, he counseled; look to chains such as Starbucks for ideas. “We make a concerted effort to blend in and look like any national retailer,” he offered. He also took on what might be described as the third rail of check cashing in the late 2000s—what he dubbed the “highly controversial issue” of direct deposit (I would attend a later workshop titled “Direct Deposit: Friend or Foe”). Many in the industry might fight direct deposit because it means losing the check-cashing fee, MacKechnie said, but at Amscot they’ve taken the opposite tack and offer their customers a direct deposit option. It has meant a short-term drop in revenues, MacKechnie acknowledged, but they also feel they’re holding on to some customers as they move up the economic ladder. Think of the loyalty that builds, he counseled the three dozen or so people sitting in the audience. Invariably some of those customers will slide back down that ladder—especially in the current economy—“and then you’ll be there to cash their unemployment checks.” Think as well of the PR benefits. “It lets us present ourselves as more of an integrated financial institution,” he said. “It helps give us a story when we talk to reporters.”
If MacKechnie had one message to impart above all others, it was that today’s Poverty, Inc. entrepreneur needs to become indispensable. Sell monthly commuter passes, lottery tickets, and postage stamps. Let people pay their parking tickets at your offices. You won’t make much, if any, money on any of these items but customers will have extra reasons to stop by your stores and, more important, you’ll find yourself with a strong set of friends when the industry is under attack. “We figure if we work with and become an arm of government,” MacKechnie said, “they’ll hopefully be less likely to do away with us as it will directly affect them.” Similarly Amscot has offered its stores to local gas and electric companies anxious to shed the costs of operating satellite offices. “They’re not much of a moneymaker for us,” he said of these deals, “but they make us truly part of the fabric of the community.”
Meeting with elected officials should be another priority. “It’s not just about giving contributions,” MacKechnie said. Sell your story. Show them the quality of your stores. Let them see what you do. “And then make sure you issue a press release about the visit,” he said. MacKechnie figures that he, his brother, and their father have met with more than two hundred elected officials.
Throughout the weekend, the check cashers, payday lenders, and others taking the stage in Las Vegas patted themselves on the back for all they were doing on the philanthropy front. But sitting in the audience I often had the opposite reaction: That’s the extent of your giving? The first time I had that feeling was listening to MacKechnie. The numbers he was talking seemed paltry for a company with Amscot’s size and reach—$500 here, $500 there—and mainly he stressed the public relations advantage of sharing bits of their largesse. “Let the broader community know you care,” he advised. “Make sure you send out a press release whenever you make a contribution.” Later I checked and learned the company issued eleven such press releases in 2008, each announcing a $500 donation, or a total of $5,500. That worked out to about $32 per store.
MacKechnie had one more idea to share before turning over the microphone: Amscot has banned the “at times controversial phrase ‘payday loan.’” They stopped using the term in promotional materials, he said, and they no longer use it in press releases. Instead they now offer a “life-line product” called a “cash advance.” “We figure that way we can avoid some criticism by not being lumped in any time there’s something negative written about payday,” he said.
Mike Hodges of Nashville had made the same decision. When he started in the business in 1996, at the age of twenty-four, Hodges did nothing but payday loans. But by the time of the check cashers’ show near the end of 2008, he was operating twenty stores and building a twenty-first and each provided, among other fee-generating services, check cashing, auto title loans, money transfers, and prepaid Visa cards. But though he might have started off in the payday business, that’s not a word you’ll hear watching one of the commercials his company, Advance Financial, runs on local television stations, and it’s not a word you’ll hear spoken by his clerks, all of whom have been instructed to use the term “cash advance.” “The term ‘payday’ has become the black skull and crossbones of our industry,” Hodges complained.
Hodges and his wife, Tina, who helps him run Advance Financial, were my luncheon companions on my first day at the convention. Mainly that meant listening to Mike Hodges rail about the big chains that run the payday industry. Payday is not an easy sell given what he described as a cultural bias against “the waitress with three kids who is short $200 on her rent,” but industry leaders haven’t helped their cause much. “It’s like our industry is just now figuring out that we’re not selling bottled water,” he said. For a long time the big chains have been so focused on opening new markets that they have failed to do the hard work of educating the wider public. “They’ve put much more effort into lobbying and not enough into public relations,” Hodges said. As a result, “We’ve let ourselves become easy targets at the hands of consumer advocates.”
Despite that, business remained good inside Advance Financial through hard economic times, so much so that Tina Hodges’s main complaint was a worldwide credit freeze that put their expansion plans on a shelf. I expressed amazement over twenty-one stores in a single metro area and Tina Hodges shrugged. “We could have a lot more,” she told me. But with credit tight, any money committed to opening more stores means less money out on the streets. “With twenty stores, they’re not rich yet,” Steven Schlein told me when I brought up the Hodgeses the next time we met. “But they’re making a good living.” He wasn’t much interested in talking about Mike Hodges’s criticism but he was eager to learn more about Advance Financial. He was more impressed when I told him its stores offered much more than cash advances, including check cashing, debit cards, and beyond. He let out a little whistle of air. “Twenty stores is a lot,” Schlein said. “The number I hear is $100,000 as a ballpark for profits per store. That’s $2 million a year.”
There was a small convention floor upstairs from where the workshops and the speeches were held. There large and familiar companies such as Western Union and H&R Block shared exhibit space with the more modest-sized booths occupied by small companies like Citylight Bullet Proof (“for all your bulletproof needs”), Cheklist magazine (the publication representing the “neighborhood financial services provider”), and the Rolland Safe Company. A veritable ecosystem had formed around the poverty industry, and walking the convention floor meant hearing from multiple competitors in any number of subspecialties, from debt collectors who had shown up in Las Vegas to offer their services to software makers there to peddle specialty products. Several companies sold themselves as offering better “card-scanning solutions,” and at the booth for Acton Marketing, Zach Gabelhouse, the residential numbers genius for this Lincoln, Nebraska–based direct mail company, told me why his company was superior to the four or five other direct mail companies vying for the attention of conference attendees. The practice of microtargeting has meant that “prospecting”—the art of getting people in the door—is routine nowadays. “The real challenge is retention,” Gablehouse said. “You need to maximize the household value of that customer. Where we come in is we help you to maximize your share of wallet.”
Over the years there have been plenty of companies to do just that, starting with Western Union decades ago. As if intent on strutting its central place in the check-cashing industry, Western Union occupied a stretch of real estate in the middle of the convention floor so large that it would have been impossible to miss, even if the company hadn’t bothered to hire an Elvis impersonator. Squadrons of sales people dressed in the company’s familiar yellow and black didn’t talk to visitors to the booth one-on-one so much as they swarmed them in threes or fours. Western Union may be synonymous with the telegram, one explained to me, but the company had exited that business altogether a couple of years ago. Nowadays, the company, a global powerhouse that booked $5.3 billion in revenues in 2008 and $1.2 billion in pretax profits, makes nearly all its money wiring money across borders, primarily through deals with third parties. “We’ll cut franchise deals with anyone who’ll have us,” another of the buzz team told me. “We’ve got deals with the big discount drugstore chains, with grocery stores, with clothing stores.” But Western Union’s best partners have been the country’s check cashers and other Poverty, Inc. businesses, all of which earn a small amount of the $50 or so Western Union charges for every $1,000 a customer wires overseas. And that’s only the start of the benefits, according to a Western Union brochure I took with me. Supposedly, three in every four people walking into a store to wire money spend money on a second product at that store.
Diversification has been the watchword of the forward-looking fringe financier in recent years, and any number of companies were in Las Vegas to help conference goers enhance their bottom line by broadening their offering of products. There were about a half-dozen tax preparers on the exhibit floor pitching the instant tax refund as the perfect way to goose annual revenues (“CHARGE to prepare returns and CHARGE to cash their check”). There were companies pitching prepaid phone cards and also several pushing gold buying as the ideal side business (“add significant income to your financial service center’s bottom line at virtually no cost”) in hard economic times, when more people would be needing access to quick cash. The largest crowds, though, seemed to be drawn to the booths of those peddling the debit cards that help Wichita’s Tim Thomas live the good life.
Debit or prepaid credit cards have become a sensation inside the industry in recent years. A price sheet I picked up when visiting the booth of a company called CashPass, which sells a prepaid MasterCard, spelled out why. Sell more than 500 CashPass debit cards in a month and the enterprising check casher earns a 25 percent cut of all the charges that card generates. That includes an $11.95 setup fee, a $6.95 monthly fee, and more fees when a customer puts more cash on the card. Sell more than 1,000 and your cut is 30 percent. A CashPass representative was happy to translate those numbers into dollar figures for me: 1,000 cards on average means an extra $10,700 per month added to an entrepreneur’s bottom line. The advantage to the customer is that with what in effect serves as a portable bank account, he or she has taken a step forward into the mainstream, albeit a stunningly pricey one.
Listening to speeches that weekend in Las Vegas meant hearing about any number of bogeymen. In his welcoming speech, the group’s chairman, Joseph Coleman, singled out the FDIC and its hand-wringing over those 17 million or so Americans without a bank account, the so-called “unbanked.” From the FDIC’s point of view, the people who could least afford it were paying a surcharge on their wages—the Brookings Institution found that a worker bringing home $22,000 who doesn’t have a bank account spends an average of $800 to $900 a year on check-cashing fees, or more than $1,000 annually if factoring in fees on money orders and bill-paying services—and the agency in recent years had been using its bully pulpit to pressure the banks under its charge to do more to reach moderate-income customers. Coleman couldn’t bring himself to even use the term “unbanked.” Banks charge noxiously high bounced-check fees and they revealed themselves to be so greedy they practically took down the global economy. His preferred term, to the delight of the crowd, was “the bank free.”
Several speakers spoke about competitive threats posed by Walmart, which was moving aggressively into both the check-cashing and debit card businesses with a pair of low-priced products. It cost $3 to cash a payroll or government check at a Walmart and the retail giant was offering better terms on Visa debit cards as well. Other giant retailers were also starting to nibble around the edges of the market, and for those in the cash advance business there were the online payday lenders that charged considerably more than their brick-and-mortar counterparts but had nonetheless been gaining in popularity, accounting for roughly $3 billion of the $44 billion in payday loans made in 2007.
Maybe the weekend’s gloomiest speaker was Bill Sellery, the group’s top lobbyist. The news out of Washington wasn’t good, Sellery told the crowd. Dick Durbin, the assistant majority leader in the U.S. Senate and, not incidentally, the senior senator representing Barack Obama’s home state, had introduced a bill capping the national interest rates on subprime loans at 36 percent. That would affect the payday lenders and also auto title lenders and those in the pawn business. Several congressmen were working on similar legislation in the House. The only good news was that there had been so much bad news in the previous year, Sellery said, and so Congress probably wouldn’t have much time for worrying about a group of industries on the economic fringes.
The news from state capitals around the United States was no less ominous. There were small threats to the industry, such as the occasional community voting to impose a moratorium on new check-cashing stores, payday lenders, and pawnshops, and larger threats like those in Ohio. So great was the unease over Ohio that when Ted Saunders, the chief executive of CheckSmart, the Columbus-based chain that had recently been sold to a private equity firm, appeared on a panel about mergers and acquisitions, he spent as much time talking about the election in his home state as he did his assigned topic.
The polls offered mixed news, Saunders told the group. “People out there have a very negative impression of our industry,” he said. “It’s really scary. Our data shows that we rank just below prostitutes and politicians in terms of popularity.” But the problem—that people don’t understand the value proposition we offer customers—could also prove the industry’s saving grace. Focus groups showed their side “slightly ahead among people who have seen our commercials and understand our message,” Saunders said. The key was raising enough money to deluge Ohioans with television ads. He reminded people that on the convention’s first night there had been an appeal for every operator to donate $1,000 per store to help in Ohio and also Arizona, where there was a second, less pressing referendum on the ballot. (On the convention’s second day, a different speaker suggested that every chain donate $50 per store to a FiSCA Scholarship Fund.) They were planning on spending “in the high $30 million range,” Saunders said, over the last ninety days of the campaign in the hopes Ohio would serve as their Maginot Line. “If we can beat back this attack, we take away this notion it’d be easy to put us out of business,” Saunders said. “This can be our line in the sand.”