Profit$ You Can Bank On

Here in the 21st century, providing c-store customers with financial products and services like money orders, check cashing, ATM access, electronic bill payment and payday loans can be as easy, and as necessary, as selling soda, candy and beer.

But it requires a bit more thinking.
Convenience store operators are increasingly partnering with providers like Western Union, MoneyGram and others, or creating their own financial services networks to serve a consumer base that includes swelling numbers—most agree it’s between 30 million and 40 million—who make up the so-called “unbanked.”

Focusing on these sevices can leverage stores’ existing traffic, bolster one-stop shopping convenience and let customers avoid banks’ high fees, minimum account balances, per-check charges and seemingly never-ending fees for bounced checks and overdrafts.

“I’m told there are more than 30 million folks living in the U.S. that are unbanked,’” said Jim Callahan, director of marketing for Geo. H. Green Oil Inc. in Fairburn, Ga., which recently added Western Union money orders to both of its truck stops and now offers full-service Green Plaza check cashing centers. “These are our best customers and our target.”
In his market area, “the Hispanic community contains many customers that fall into this category—hardworking and quite proud,” Callahan said. “They work, many in construction, all week and use us to cash checks, pay bills and send money home.”

Green Oil’s partnership with Cash it USA means the chain is purchasing software, hardware and know-how from an experienced provider. Western Union provides Green Oil with “loaned equipment and a recognizable name,” Callahan said, adding that the chain took its time to make a decision. “In the end, since we already had an ideal location that housed one of our convenience stores, we invested the money to make it happen.”

Targeting a Need
The customer for check cashing, bill payment, money transfers and money orders is typically this unbanked or underbanked customer, said Clayton Cutchall, category manager of financial services for Dallas-based 7-Eleven Inc.
ATM withdrawals and the 7-Eleven Visa are services used by a wide range of convenience customers. 7-Eleven’s ATM and Vcom partner is Cardtronics. The provider of money orders is Western Union, Cutchall said.

7-Eleven has installed its Vcom 24-hour check-cashing machines in more than 1,000 stores. Vcom also provides ATM services, Western Union money orders and transfers, and bill payment through self-service terminals.

Cutchall said 7-Eleven has been in the financial services business for as long as it has because customers expressed a need for these products.

“I can think of at least three reasons why convenience store operators would benefit by offering financial services in their stores,” said Lynne Strang, vice president of communications for American Financial Services Association (AFSA) in Washington. The first, not surprisingly, is increased sales. “If you offer people a means to pay for their purchases they are going to buy more from your stores. That would probably be the biggest motivation for doing it.”

Another reason: the convenience of one-stop shopping. “If you have those things to offer to your customers in your store then they don’t have to go elsewhere,” Strang said. “They can handle everything in one location. They can get the money they need to make the purchases and make the purchases all in one place.”

The third reason flows from the first two: competitive advantage. “One particular operator may offer this, but the one down the street may not. So you’re providing something that your competitor may not necessarily offer.”

7-Eleven remains committed to the concept. In March, it launched a proprietary Visa card with Chase and remains in the “early stages” of exploring other over-the-counter financial services offerings.  The company doesn’t see a downside to financial services. “We continue to look at other product offerings that our customers want and will fit the financial services needs of the convenience-oriented consumer,” Cutchall said.

When introducing new products and new concepts like check cashing, 7-Eleven will first test them in select stores to evaluate the customer acceptance.

“When we first launched Vcom in 1998, we created a 9-foot-wide piece of equipment, then followed with several smaller versions (to work) with our hardware and software,” Cutchall explained. “When we do introduce a new service, we provide training for store personnel on how to use it or what they need to know about the equipment and processes to better serve customers.”

“High Margin, Fairly Expedient”
Jon Dover, director of national accounts for MoneyGram International Inc., the payment services company based in Minneapolis, sees the same “large base of consumers out there looking for financial services that right now are going to alternative trade classes.” It consists, he said, of “high-margin, fairly expedient transactions that can be completed efficiently and is thus worth pursuing.”

C-store operators on the whole have been late adopters to things like money transfers, electronic processing and bill payment, Dover said, though he added the nature of the business “lends itself well to people who shop in convenience stores.”

MoneyGram works with large convenience store chains, but because they are sometimes late adopters they need to pay more attention to marketing and pricing issues than competing with retailers in other channels. “How they communicate that message is going to mean the difference between having a very viable program and one that just kind of flounders along,” Dover said.

Retailers working with MoneyGram can choose to integrate their financial programs with their POS systems or rent the equipment by the month. “There may in some cases be no fee depending upon the financial offer that they put together,” Dover said.

The amount that operators get to keep on each transaction depends on the financial model a chain negotiates, as well as the amount of projected volume from the service and the type of equipment the operators decide to use. With so many variables, investment per chain is done on a case-by-case basis.

Location, Regulation
It can be a challenge for a chain to find the right fit. Strang said there are just so many variables, “everything from the part of the country in which the operator is located to overhead costs. It would be difficult to generalize.”

Indeed, the profitability of a c-store’s financial services venture “really depends on a number of factors, including what state they’re located in and what local ordinances or state statutes may come into play,” said Scott McClain, deputy general counsel for Financial Service Centers of America (FiSCA), a national trade association representing 5,000 financial service centers.

In many states, McClain and his colleagues see c-stores offering funds transfers as agents for Western Union, MoneyGram or other similar companies.

FiSCA estimates there are currently 11,000 neighborhood financial services centers in the U.S. that cash more than 180 million checks a year, with a face value of more than $55 billion. The check cashing and related financial services market is estimated at $11 billion. Payroll checks account for 80% to 90% of volume.

Another trend worth noting, McClain said, is sales of stored-value products, everything from phone cards to gift cards to prepaid debit cards.

“Customers can buy a debit card and load money onto it,” McClain said. “Then they have the security of not carrying around large amounts of cash. Periodically they can go back to the convenience store, wherever the outlet is, and load additional funds onto the card as needed.”

Depending on the state, a c-store operator can typically make anywhere from 2% to 4% on the face value of the instrument for certain types of cashed checks, such as payroll and government benefits checks. Wire transfers? “It depends on the amount of the transfer, but it can be several dollars per transfer,” McClain said.

Profits from money order sales tend to be less. The average sale, McClain estimated, “may be a dollar or so per money order. With an ATM agreement, revenue could be upwards of 50% depending on the service agreement you are able to negotiate.”

FiSCA recommends that convenience store operators speak with a representative of their state’s financial services trade association, as well as with state banking departments. “Find out about those statutes and regulations before committing to a program, McClain said.

The answers will be different in every state. In some, for example, there are limitations on the amount that can be charged for certain financial services. Additionally, there are certain federal laws that come into play with what’s termed an “MSB,” a Money Services Business.

“If you’re selling money orders, cashing checks or offering funds transfers, those are all MSB products,” McClain said. “Any money services business has to comply with federal anti-money laundering regulations under what is called the Bank Secrecy Act.”

Not for Everyone
Doug Orr, executive vice president and chief financial officer with First Cash Financial Services Inc., called convenience stores “a minor part of our business.” Since 2001, his company has been involved in a joint venture with Stripes Convenience Stores in Corpus Christi, Texas. “We’ve got a small check-cashing and short-term loan services operation in about 39 convenience stores.”

Stripes stores include a manned booth or kiosk. Said Orr: “Obviously those are high traffic locations, so to the extent that we can offer the convenience of check cashing services and some credit options in the stores, it seems to work pretty well.”
That said, executives have chosen not to aggressively expand in the c-store channel. “We’ve actually had more success with our true stand-alone stores,” Orr said, adding that growing the c-store part of the business is not currently part of his growth strategy.

Since First Cash Financial has seen mixed results on venue, Orr believes customers prefer the convenience and speed of a stand-alone check-cashing operation. “It just seems like most customers like the privacy and the convenience of knowing they can go into a fully staffed branch, as opposed to just a very small kiosk,” he said.

Others are more optimistic about the upside of offering financial services in a c-store setting. “Those operators that want to become a community financial services provider and offer a full range of financial services, including check cashing, they can do very well,” McClain said, adding that he’s seen a number of operators who start as convenience stores and slowly morph into a local community financial service leader, such as Green Oil in Georgia. “Done right, the local convenience store can become the primary source for financial services and products for needy customers in their neighborhoods.”  


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