Governments regularly transfer funds to individuals for a variety of benefit programs. When funds are transferred by cheque, some individuals access those funds through relatively costly cheque cashing services. Is this a matter for public concern, and if so, are there ways to transfer funds more fairly and effectively?
This Report is the result of extensive research and public consultation. The Project was publicly launched in March 2008 with a widely distributed Consultation Paper. The Law Commission of Ontario (LCO) received written responses from 15 organizations and individuals, and organized further meetings and interviews with 25 organizations. Consultees included a wide range of stakeholders, including financial service providers, academics, municipal and provincial governments, legal clinics, and community and advocacy organizations.
II. Key Themes and Issues
While the issue of cheque cashing fees appears narrow, a closer examination reveals that it cannot be understood without considering the effects of a number of broad social trends and complex policy issues:
III. Nature of the Problem
A. Cost of Cashing Government Cheques in Ontario
Most people who receive funds through a cheque access those funds through accounts with a bank or credit union. Included in the relatively low cost of an account is the opportunity to deposit cheques and withdraw the funds, or to immediately cash the cheque. Funds in an account may be accessed in person through a teller, or through an increasingly wide array of electronic options, such as ABMs, online or telephone banking, or debit cards.
However, a small but significant number of Canadians (approximately seven per cent, as estimated by a recent survey) at least occasionally access cheque funds through the cheque cashing industry. For a charge usually consisting of a flat fee plus a percentage of the value of the cheque, they can immediately receive the funds transferred by cheque.
The rates for cashing a cheque in this manner are relatively high compared to the cost of an account with a financial institution. Canada’s largest cheque cashers, Money Mart and Cash Money, currently charge an item fee of $2.99 per cheque, plus 2.99 per cent of the face value of the cheque. The fee for cashing a $500 cheque is therefore $17.94.
B. Impact of Cheque Cashing Fees
The Government of Ontario issues cheques for a number of social benefit programs, most importantly the Ontario Child Care Supplement (now transitioning into the Ontario Child Benefit), the Ontario Works and Ontario Disability Support (ODSP) social assistance programs, and the Guaranteed Annual Income Supplement for seniors.
There are over 370,000 beneficiaries of the Ontario Works general social assistance program, approximately half of them sole-support parents and their children. There are approximately 330,000 ODSP beneficiaries: this program assists persons with disabilities and their families.
The Ministry of Community and Social Services estimates that over three million cheques are issued each year to Ontario Works and ODSP recipients. There are no firm estimates on how many of these cheques may be cashed for a fee, but the number may be substantial. A survey conducted in March 2008 by the Thunder Bay Social Service Administration Board of Ontario Works clients who received their benefits by cheque revealed that approximately 40 per cent of these individuals cashed their cheque for a fee at an AFS business, or a pawnshop or convenience store.
Social assistance rates are low, falling far below Canada’s Low Income Cutoffs. For example, a single person receiving assistance through Ontario Works receives a maximum of $560 per month, or $6720 per year, while a sole-support parent with one child receives a maximum of $1,180 per month (including the Ontario Child Benefit), or $14,160 per year. Given these low rates, an individual paying $20 to $40 per month to cash his or her social assistance benefit cheque could experience a significant impact on the ability to afford basic necessities such as food or clothing.
C. The Mainstream Financial Services Industry
Given the relatively high costs of accessing cheque funds through AFS businesses rather than through an account with a bank or credit union, why do low-income individuals use these services?
It is estimated that between three and five per cent of Canadians do not have an account with a bank or credit union. Low-income individuals are much more likely to be unbanked than other Canadians, with some estimating that as many as 15 per cent of low-income individuals are unbanked. Those living in Northern regions are also more likely to be unbanked than those in Southern regions.
There are a number of reasons why low-income consumers may not use the services of a mainstream financial institution, and may therefore resort to AFS services:
D. The Alternative Cheque Cashing Industry
The formal cheque cashing industry is relatively new in Canada, and continues to evolve. Businesses providing cheque cashing services usually do so as part of a bundle of alternative financial services, including payday loans, tax preparation and refund services, and stored value debit cards. It is estimated that there are 750 Ontario businesses providing formal cheque cashing services.
In remote Northern Ontario communities, where neither mainstream financial services nor the major cheque cashing businesses operate, cheque cashing is provided through the network of Northern Stores, which provide cheque cashing, white label ABMs, money transfers and prepaid mastercards, along with a range of retail services.
Unlike mainstream financial institutions (such as banks, credit unions, and trust and loan companies), this “alternative financial services” (AFS) sector is subject to minimal regulation and superintendence. Only recently has there been a move to regulate these businesses in Ontario, with the passage in June 2008 of Bill 48, the Payday Loans Act, 2008. This Act will, when it comes into force, create a comprehensive regulatory scheme for Ontario’s payday lenders, including licensing, maximum cost-of-borrowing caps, a compliance mechanism and a consumer education fund.
IV. Avenues to Reform
Concerns regarding fees for cashing government benefit cheques are not new. There have been a number of initiatives across Canada and in the United States aimed at addressing the problem: