Innovations in Personal Finance for the Unbanked: Emerging Practices from the Field

T R A N S A CT I O N S A N D B A S I C B A N K I N G

CASE STUDY

Cash & SaveUnion Bank of California

A hybrid banking service offering check-cashing services, full-service banking products, and financial literacy training
Cash & Save, located in Southern California, is a hybrid check-cashing service and transitional network of bank branches started by Union Bank of California (UBOC) nine years ago to increase its customer base and to help

Name and Location Business Model Services Offered

Cash & Save, Union Bank of California, CA Check-cashing depository

Check cashing, Nest Egg savings accounts, basic checking accounts, money orders, and money wiring

low- to moderate-income check-cashing customers move to traditional banking services. This network has benefited both the bank and the lowto moderate-income communities it serves. Cash & Save is profitable, has low operating costs, and provides a wide range of services. Moreover, 45 percent of its customers have made the transition from check cashing to conventional bank products. The Cash & Save model extends its reach by providing its transitional banking services, such as the Nest Egg savings account, through Nix Check Cashing, a successful California outlet. In 2000, UBOC bought a 60 percent stake in Nix and created the Nix Alliance. As of May 2002, 20 Nix outlets offered UBOC banking products, in addition to check cashing, through this alliance. By the end of 2002, 10 more outlets were added. Cash & Save branches are separate from the Nix Alliance and continue to expand, with branches inside major supermarkets and retail establishments identified by UBOCs Corporate and Commercial Banking Groups as customers and prospects.

Constituency Served Success and Outcomes to Date

143,000 low- and moderateincome check-cashing customers in California 45 percent of repeat check-cashing customers have moved to traditional banking products. Cash & Save offers highly competitive check-cashing prices. Financial education offered in collaboration with community-based partners has allowed many customers to rebuild their credit. Cash & Save has facilitated immigrant banking initiatives and has created Individual Development Account matched-savings account programs.
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T R A N S A CT I O N S A N D B A S I C B A N K I N G

Cash & Save Union Bank of California

Cash & Save became profitable in 1999 and exceeded profit margins in 2000. The Nix Alliance has been key in increasing UBOCs scale and profitability. This alliance shows how check-cashing outlets can be good partners for traditional financial institutions in their efforts to reach the unbanked. Through the Nix Alliance, UBOC has tapped into the many advantages that check-cashing outlets offer-volume and scale, lower operating costs, an existing investment in fixed costs, customer familiarity, many locations in the target markets, an established presence in the community, and an existing facility to which extra services and features can be added inexpensively. However, the alliance has been criticized because check-cashing companies are often perceived as profiteers, and consumer advocates are unhappy when banks team with them.

Cash & Save is a lower-cost alternative to traditional banking outlets and does not require customers to have an account with UBOC to cash checks. Cash & Save accepts deposits, and many branches have fullservice ATMs. It offers a complete range of checkcashing services, including payroll and government check cashing for non-account holders; transitional banking services; and full-service banking products, deposits, and mortgages. The staff is multilingual, and branches are open seven days a week. Cash & Save emphasizes combining products, service, and education to turn check-cashing customers into depositors and savers. Its partnership with Operation Hope Inc. and other community-based organizations enables low-income consumers to gain access to financial literacy training, education, and counseling services.

History
We started Cash & Save to meet basic transaction needs at a reasonable, below-market cost and provide a channel for individuals to enter the mainstream financial services market through a model of transitional products, financial literacy, and collaboration with community-based organizations, says Yolanda Brown, senior vice president, Union Bank of California.
Founded in 1993, Cash & Save is a business unit of UBOC, which is the third-largest commercial bank in California and has $34 billion in assets. UBOC has 260 branches in California, Oregon, and Washington, including 200 traditional branches in California and 50 that are located inside supermarkets, plus six traditional offices in Washington and Oregon. Cash & Save combines check-cashing services and transitional products with traditional bank products. Transitional products include a savings account

T R A N S A CT I O N S A N D B A S I C B A N K I N G

Cash & Save Union Bank of California

Over the past two decades, the number of unbanked households in California has increased significantly and now represents a large, mostly ignored market.

called the Nest Egg and money orders. Nest Egg accounts come with six free money orders a month, can be started with $10, and offer electronic transfer accounts and regular checking and savings services. In 2000, UBOC purchased a 60 percent equity stake in Navicert Financial, Inc., known as Nix Check Cashing, and established the Nix Alliance. Nix is a 34-year-old company with 600,000 customers served by 47 branches in Southern California. The creation of the Nix Alliance made all UBOC banking products including Cash & Save transitional banking products, ATMs, consumer deposits, loans, and small business productsaccessible through 20 Nix outlets. Moreover, Nix has modified its prices for check cashing and some of its other products to benefit the consumer. In addition, UBOC has a partnership with Operation Hope Inc. (OHI), a community development corporation, through which low-income consumers gain access to financial education and counseling services.

division. Studies showed that over the past two decades, there had been a significant decline in banking services. Between 1984 and 1999, the number of banks in the state declined by a dramatic 28 percent, and the number of branches

fell by 23 percent. Meanwhile, services provided by check cashing and payday lending operations had filled the gap, with more than 3,500 new licenses granted in California since the 1980s. The shortfall was aggravated by increases in population. UBOC saw substantial opportunity in this growing market but realized that traditional banking models were not appropriate and that new models were needed. This realization led UBOC to start Cash & Save as a new business unit in 1993. Since that time, this service has expanded to 15 branches.

Business Model
Program/Product Description and Outcomes
UBOC sees the unbanked as a potential new market and is reaching out to low- and moderate-income households that do not have a relationship with a traditional banking institution. It offers this customer base a range of financial products that aim to increase savings, homeownership, and small business activity. UBOCs goal is to move low- to moderate-income customers to conventional banking, while creating loyalty and capturing a significant portion of the unbanked population. UBOC studied the California banking industry extensively in order to maximize the impact of its Cash & Save

Because volume is critical for success, UBOCs main strategic focus for Cash & Save was to achieve scale quickly and to gain immediate access to a large customer base.

With

143,000

customers,

Cash & Save is a profitable operation and continues to extend its reach by expanding inside high-volume and retail supermarkets

establishments. Nix, with 600,000 customers and 47 stores, offered a viable parallel delivery option: Stores were spread throughout the area

and already supported a fixed investment through their check-cashing operations. In 2000, UBOC purchased a 60 percent stake in Nix and established the Nix Alliance, whose locations feature a UBOC nocharge ATM (even for customers of other banks) and a new accounts information window where UBOC staff are available to discuss bank and OHI products. UBOC has supported the Nix Alliance with staff specifically designated for program development and operation.

Cash & Save branches are federally chartered bank branches regulated by the Office of the Comptroller of the Currency. Nix stores are not and do not engage in branching activities. Legal agreements between UBOC and Nix govern the expectations, roles, and responsibilities of the respective parties.

T R A N S A CT I O N S A N D B A S I C B A N K I N G

Cash & Save Union Bank of California

In part because of increased market competition and tighter regulation, the rates for check cashing in Southern California have dropped during the past few years. For example, to cash checks up to $1,000, Nix charges $1.85, compared with a typical charge of $3 in the San Francisco area. Nonetheless, as part of its alliance with UBOC, Nix has agreed to lower its check-cashing prices. It also has agreed to modify its payday loan product to limit the number of rollovers, offer consumer education information, provide a description of all alternatives to payday loans, discuss the risks and problems with the applicant, and provide a one-day waiting period during which the customer can decline the loan with no penalty. Neither UBOC nor its Cash & Save division offers payday loans. Several years ago, UBOC attempted a payday lending pilot program through Nix stores, but it had a high default rate that resulted in its termination.

As of May 2002, 20 Nix stores had converted to the alliance model, and by the end of 2002, a total of 30
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outlets were slated to offer UBOC banking products and services along with traditional check cashing. The Nix acquisition allows [UBOC] to, in effect, gain a presence in a marketplace where there are far too few banks, says Thomas Branch, a senior vice president at the bank. Our strategy is to work with Nix to provide access to mainstream financial services to encourage financial education.

Products/Services and Pricing

Pricing of Services at Cash & Save
TYPE OF SERVICE PRICE
For members, 1 percent of the face value of the check; for nonmembers, 1.5 percent. A $10 opening balance and $25 per month; the account earns interest and is eventually rolled over to a savings or a checking account. Six money orders per month are included with a Nest Egg savings account. Additional money orders sell for 50 cents in Cash & Save stand-alone branches. Most customers find six money orders a month sufficient for bill paying. $15 for a $300 MoneyGram or $5 for a Cash Card (up to $1,000) that can be used to transfer money within the United States and internationally. This direct-deposit account requires no opening balance. A $1 opening balance, plus a $3 monthly charge; the limit is five free checks a month.

Check cashing Nest Egg savings account

Consumer Segment Served

Cash & Save serves 143,000 check-cashing customers in 15 branches. The Nix Alliance serves 600,000 check-cashing customers in 47 stores.

Money orders

Technology
Each Cash & Save has several workstations with a computer and a dispenser, and an internal vault for funds. The computers hold transaction histories with UBOC, plus photo- and signature-based computerized identification.

Money transfers

Nix stores and UBOC are connected to the World Wide Web and maintain a platform for conveying and sharing information.

Electronic transfer accounts Basic checking accounts

Location and Hours

Cash & Save branches are small, in some cases only about 250 square feet. UBOC has Cash & Save branches inside traditional branches, retail and warehouse grocery stores, and a laundry center/

T R A N S A CT I O N S A N D B A S I C B A N K I N G

Cash & Save Union Bank of California

tomers and community-based groups. Through the Nix Alliance, UBOC uses multilingual materials to market its products to a broader customer base.

Location and long hours of operation are important facets of the business plan.

multi-retail setting in Southern and Central California. Nix stores are spread throughout Southern California. In addition, UBOC has a large

number of local branches. The result is an extensive network of branches and stores, sometimes tied together technologically, to deliver services. Moreover, the hours are convenient. Cash & Save branches are open seven days a week, with extended hours (9 a.m. to 7 p.m. on Monday through Thursday, 9 a.m. to 8 p.m. on Friday, 10 am to 6 p.m. on Saturday, and 10 am to 4 p.m. on Sunday). Since branches are relatively small, total staffing requirements are four full-time and a few part-time employees per branch.

Bottom Line
Financial Costs and Profitability
Although detailed information is proprietary and not available, Cash & Save is a profitable business unit fully owned by UBOC.

Profitability
Cash & Save became profitable in 1999 and has subsequently exceeded targets. The rate of return on investment for the Nix Alliance is proprietary as well, but it is likely that there has been a reasonable overall return from the start. This program has brought the bank millions of dollars in new checking and savings accounts. The spread on these accounts, along with the fee income, has made Cash & Save profitable and roughly equal to the rest of the bank in rate of return on equity targets. The Cash & Save operations that are placed in existing UBOC facilities are more profitable than stand-alone branches because they can take advantage of existing overhead and infrastructure. Cash & Save has cumulative losses of 2 percent of revenue. Given average losses for check cashing stores in the state (between 4 and 6 percent), Cash & Save definitely stands out as a profitable enterprise.

Education/Outreach/Marketing
The partnership with OHI and a number of other community-based organizations provides low-income consumers with access to financial literacy training, education, and counseling services. OHI now features Cash & Save check-cashing and savings programs in three of its inner-city Los Angeles locations. These organizations provide homeownership counseling and computer training to fulfill Cash & Saves mission of

Realizing the importance of economic literacy in moving low-income individuals and households from check cashing to mainstream banking, UBOC has ongoing partnerships with a number of community-based organizations.

creating self-sufficient customers in the future. Some targeted training materials are available for customers wishing to obtain a payday loan. Cash & Save makes extensive use of direct point-ofsale marketing, with brochures, ads, flyers, and other similar marketing materials, along with referrals from current cus-

Start-Up Costs
The bank subsidized start-up costs for both the Cash & Save effort and the UBOC/Nix/OHI partnership. Start-up costs for Cash & Save included program development, kiosk construction, purchase of tech-

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Cash & Save Union Bank of California

nology, staff training, and all losses incurred until the break-even point was reached. The initial investment was less than $200,000 per Cash & Save branch. Start-up costs for the Nix Alliance included the program development and the initial investment, which totaled $18 million in equity investment, mezzanine debt, and traditional senior debt. The breakdown and terms of this investment package are not available, but on average, starting a bank branch requires about $800,000 for capital and staffing, and the figure is much higher in many parts of California. It can take a branch up to seven years to break even, so losses during the start-up period must also be covered.

Major Findings
In many ways, Cash & Save is a success story. Some 45 percent of repeat customers have moved from check cashing to traditional bank products. This rate started at about 3 percent in 1993, when Cash & Save began, and has increased every year. The rate of increase seems to have leveled off in the past two years, however, and stood at only 2 percent in 2002. Major findings from UBOCs Cash & Save experience include the following:
The business model is viable. Cash & Save has demon-

Operating Expenses
Depending on the configuration of the branch distribution channel, monthly operating expenses, including staffing costs, range from $10,000 to $20,000. Staffing costs for Cash & Save operations are modestly higher than the costs for check-cashing operations. Bank staff may have more responsibilities, especially since banks are looking for ongoing relationships (which require well-trained staff for cross-selling, discussion, and customer assistance) rather than a series of individual transactions. Because of technology, policies and procedures, and local hiring practices, Cash & Saves operating losses are minimal.

strated that a business model that combines check cashing with carefully thought-out transitional products can be a financially viable way to serve low- to moderate-income, unbanked households. UBOC also has made an innovative business decision to buy an ownership stake in Nix, which offered it many business advantages in reaching and servicing unbanked customers. However, some consumer advocates and industry participants have expressed concern that the partnership might legitimate some of the abusive practices of the payday lending industry.
Scale and pricing are key to success. A key factor in the

success of Cash & Save is its business volume, which allows it to operate at a scale where it can offer prices that are attractive to customers and satisfactory to consumer advocates and still yield a self-sustaining profit level.
Extended hours mean convenience for customers. Cash

Evaluation
The bank planned a thorough evaluation of the network: A senior officer heads the Cash & Save effort, and another senior officer was made responsible for the Nix Alliance. Both programs are business efforts and receive extensive attention from a business perspective, along with the social perspective. The bank also created a community advisory board to review and comment on its programs.

& Save branches are open seven days a week. These extended hours have allowed Cash & Save to compete with check-cashing outlets.
Institutional commitment makes the difference. UBOCs

executive management commitment has been partly responsible for Cash & Saves success. Long-term financial backing was necessary to plan these programs and to stay with themeven when there were

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Cash & Save Union Bank of California

satisfy the needs of customers, potential business partners, and consumer advocates. The UBOC experience demonstrates the importance of careful thinking, advance planning, ongoing evaluation, and longterm commitment.

uncertaintiesuntil they were able to prove their value. The same level of access and financial backing will be essential for anyone planning a similar venture. Cash & Save and the Nix Alliance are check-cashing depository models that have profitable yields and that

Cash & SaveUnion Bank of California

Yolanda Brown Sr. Vice President 445 South Figueroa, Suite 700 Los Angeles, CA 90071 213-236-5700 yolanda.brown@uboc.com

One of a series of case studies on personal financial services in distressed communities. Compiled by the Fannie Mae Foundation. The opinions expressed in these case studies are those of the nancial organizations featured, and do not necessarily represent the views of Fannie Mae Foundation or its ofcers or directors.

2003 Fannie Mae Foundation. All Rights Reserved.