Thursday, September 24, 2009

Check Out

A few days ago, I came across an interesting article in the LA Times about two supermarket chains operating in California, Whole Foods and Fresh & Easy: Grocery stores taking check use off shoppers' lists. Anything that has to do with Whole Foods interests me, of course, and there is a Fresh and Easy going in just a few blocks from my house. The article opens (my emphasis):

Long before banks started locating branches inside supermarkets, grocery stores acted as informal financial establishments, cashing payroll checks and personal checks to provide ready cash for their customers. That's starting to change.

Whole Foods Market Inc. is considering banning the use of personal checks at its stores and this month stopped accepting checks at two stores in Los Angeles County and one in Arizona as a test.

Fresh & Easy Neighborhood Market, the California division of British retailing giant Tesco, won't take personal checks at any of the 70 stores it operates in California.

"Supermarkets used to be a repository of checking, cashing payroll and personal checks, but in an age of direct deposit and debit cards, that's not something that is relevant to their customers anymore," said Mac Brand, a Chicago food industry consultant.

Both I and the Spousal Unit remember an era before ATMs, when Mom or Dad would write a check for $20 (or $12, or $36, or whatever specific amount they needed) above the grocery purchase and get some cash back from the grocery store till. You had to be known at the grocery store to get this privilege most times and it was how you got quick cash. It still can be:

Vons, Albertsons and Ralphs -- the stores most likely to have a bank branch within their locations -- continue to accept checks.They also cash payroll checks, although the chains typically charge a service fee of about $1 to about 1% of the check, depending on the municipal regulations of the city where the store is located.

Representatives of the chains said there were no plans to end the services, and one supermarket industry executive questioned why, in an environment of increasing competition for shoppers, a company would add a barrier to potential sales.

So Ralphs will cash my payroll check, for a service fee, but Whole Foods will not? Vons will take my check, but Fresh and Easy will not? Sounds like these are services that some customers still want.

Such as customers who don't have direct deposit, or who need that extra day to "float" the check, or who can't get a credit card but need to defer that purchase just a tiny bit. (I'm also reminded of The Dude buying a carton of milk that cost less than $1 with a check in The Big Lebowski, but I digress...). Or even just people like my parents who don't have an ATM/Debit card (or, if they do, it is sitting unused in the desk drawer) and only use credit cards when they are buying something on credit. Everything else is cash and check. A lot of checks.

Credit cards are getting harder to come by, have higher fees, higher rates and lower credit lines. Banks are pushing debit cards like crazy, as are merchants, and nobody likes checks. ATMs nickle and dime (well, quarter and dollar) you if you aren't in the network when you make a withdrawal. What we're seeing is the rise of an electronic wall around ordinary, mundane transactions, like buying groceries.

Yves Smith of Naked Capitalism (You *do* read it everyday, don't you?) had a recent post on the dangers of using a debit card, Why Do Consumers Accept Debit Card Abuse? There are a few details she may have over-emphasized (read the comments for some alternate perspectives), but she does a thorough smack-down on why banks want to encourage use of debit cards among all customers. It's the fees (or, as Lambert cheerily reminded me, the rents) that can mount up to obscene levels within a day or two because of a cascade of overdrafts.

What Yves didn't get into in her post, which focused on the relationship of the bank and the consumer, was on why merchants are just as eager as banks to get customers to use debit, not credit, cards. Before I got into IT, I worked for a credit card processing company. It was a dull job but had nice people and I learned way more about the credit card indstry than I really wanted to know. The basic way the credit card processor makes money is by charging a combination of a flat transaction fee of a few pennies plus a percentage of the dollar value of the sale for each transaction. Different cards and processors charge different rates and American Express was notorious for having the highest rates. There was usually a minimum amount on credit purchases because below a certain amount, the merchants lost all their profit to the fees. Different industries paid higher fees than others due to fraud. The group in the company who had the best time was the fraud recovery folks because every dollar they recovered was kept by the processor, not paid to the credit card company. They were a loud and vicious bunch.

Debit cards run through a processing network, but they don't have the kinds of merchant fees that credit cards do. They also cost singificantly less than checks to process, so it is absolutely in the interest of any merchant that sells a high volume of low to medium priced goods to have the purchaser use debit, not credit. Even using debit cards like credit cards is a hit to the merchant because then the transaction goes through the credit network, not the debit one, and the merchant is hit with credit fees.

Meanwhile, back at the consumer ranch, the purchaser is at constant risk of fraudulent use, unable to count on "float" to help manage cash flow, may be liable for all the fraud on the card (not just a nominal amount as with a credit card), has no purchase protection, and now has all of their transactions digitized and distributed instantly, with a perfect connection between their debit card number and the specific items that were purchased. It is much harder to link a processed paper check that way, and you can't link cash.

So let's talk about food. What does it mean to buyers when a grocery store won't take checks? You have cash or you have plastic. Who is hurt by this? People who do not have regular access to banks, who do not have credit and whose cash on hand is irregular. People without liquid savings, such as an elderly woman who lives on Social Security and owns her house, but has little or no savings and lives check to check. Someone who doesn't have a bank account. Someone who needs to cash a payroll check so they can buy groceries first with the cash. It's no longer so simple to get cash, remember. You have to either go to a bank where you have an account and use your ATM to withdraw money or stand in line at the teller and do a withdrawal, or else cash a check (such as a payroll or benefit check) at a bank where you don't have an account (assuming they will do it) or go to a check cashing service and get hit with usurious rates. Or you go to your local grocery store of a decent size where they know you.

What this does is strengthen the plastic barrier between people and the most ordinary and necessary of commodities, food. In the case of stores like Whole Foods, it places pressure on the shoppers to conform to purchasing habits that benefit the retailer in ways beyond making a simple profit - it reinforces class barriers (read this post by a Santa Barbaran thrilled that all those icky, old, slow check writers are soon to be banned from her beloved Whole Foods! And then read the comment thread for an extra dose of elite thinking, both liberal and conservative), it makes the consumer more trackable, it shifts the burdens of financial risk onto the consumer.

In terms of Fresh and Easy, there seems to be a more complicated story because of the odd market niches it is trying to fill, not entirely sure if it is going upscale or downscale, clearly trying to capture the high-end chic of the typical WFN shopper, yet also trying to crack into low income areasas well, where a large mega-grocer can't afford the overhead. In those cases, their sales strategy is less debit vs. check as much as plastic vs. cash, with underserved areas being more likely to use cash in the first place because they are also underserved by banks.

I look at the situation and I see two fault lines.
  1. Those who have/don't need credit and those who do, with those who do having their exposure to financial risk steadily increased. If you have great credit, it probably means you also have solid cash reserves and have the luxury of choosing between payment methods. If you don't have good credit, you will benefit the most by being able to use personal checks (a form of credit - the merchant has to wait for their payment, if only for a business day) and the least by having instant and manipulated electronic transfers from your accounts. Cash is increasingly difficult to obtain.
  2. The social divide between the plugged in and the outsiders. Lower end stores may still take checks because that is their clientele. They will have inferior/deprecated goods, less safe shopping environments, and social stigma. People who can use electronic transactions with certainty will, by that marker, be granted access to premium/desireable goods, luxurius shopping environments and social approval. Mid-range places, from Albertsons to Trader Joes, will waver and have to decide how they will treat the marginal cases, those who appear to be financially sound, but whose plastic may be worthless. Where does the risk go in those cases?

In short, it looks more than a little like the collapsing housing market. Except in grocery stores.


PS - For what it's worth, I buy all my groceries and just about everything else on my Costco branded AMEX. Cash reward on purchases that pays for the annual fee and enough in addition for one Costco trip. I have never used a debit card and never will. I do all my banking through ATMs or online sites. I make full use of class position and economic leverage to improve my cash flow.


Anonymous said...

I recently discovered this:

If someone pays you with a check drawn on Bank of America and you walk into a BofA to cash it, they will charge you $5 unless you have an account with them.

Shainzona said...

I recently discovered this:

Chase is not a national bank....we moved from NY to Arizona and our 35 year old NY checking account cannot be "linked" to our Arizona accounts. So if I have a balance of less than $15,000 (HA!) we are now charged fees on all accounts under $15,000.

I have never used my debit card. I like to write checks at the grocery store (and I have them pre-filled in so I'm not slow!) 'cause I am in control of my account and I don't want to charge food on credit (it's too soon consumed and I don't want to pay for yesterday's chicken with next months pay).

Anonymous said...

My partner and I own a small shop in Kennebunkport (in summer months, traffic is mostly upper middle class to wealthy) - due to exhorbitant [Capital E] fees of AMEX, we don't accept.

Sometimes a customer will still slip one through and we'll more than lose any profit on the transaction, all for the sake of their miles or cash back-- it's frustrating b/c it's on the back of small businesses like ours. We don't take Discover either, again due to the fees.

We generally don't accept checks, and in five months only one person has asked. We are willing to make the occasional exception for locals.

Excellent points on erecting plastic barrier between the classes, but as a tiny 2-person business (both of us coming from low barely-middle class families) who uses only earth-friendly materials including packaging that costs 3x the plastic crap, we can't afford to take the chance on checks.

Or AMEX, but that's the other end of the spectrum. We don't jack up our prices and work really hard to make our 100% earth friendly products affordable for all income levels, so to get smacked with extra fees (or collections charges) is hard.

Anonymous said...

interesting. When I lived in Belgium it took me forever to adjust to the way they handle financial transactions. They do almost all their small purchases through debit ("Proton") cards, and everyone seems to be on one system that links to your account no matter what bank you're with. Otherwise, cash is used. Credit cards are much less common and some places don't take them at all. Paper checks are non-existent. Period. Payroll and other deposits, bill payments, etc. are all done by electronic transfer.

They all - consumers and merchants - love the debit card system because it makes the purchase process faster - you wave or swipe your card, sign, and go - and you don't have to worry about making change, etc.

Culturally and in terms of public policy, they discourage the use of credit. I got the impression they came up with their debit system as a way of harnessing the convenience of plastic without promoting the evil of profligate spending (they get that thriftiness thing from their northern neighbor).

Koshem Bos said...

The widening gap between the haves and the haves nots shows itself in grocery stores in several forms. One is mention in the post. The other, hidden but poisonous, is the the percentage profits these stores extract from customers. The "advertised" profits are way lower than the real profits..

The whole market is contorted the way health care insurance companies are. That is, prices are way higher than justified.

Nath said...

In response to Burnsey Bridges, the system in the Netherlands is indeed much the same as in Belgium, though perhaps we use cash more than debit cards. My local supermarket in theory accepts credit cards (since last year or so), but I’ve not seen anyone pay with one yet.

On the whole, if people use credit cards in stores, it will be when buying electronics, furniture, expensive clothing and luxury stuff, and in restaurants, but not for daily spending.

Myself, for groceries, I get a weekly amount from an ATM, and pay cash in the stores; simple, quick, and easy to stay within budget.

The lack of paper cheques? We used to have them, but they were phased out with the introduction of ATMs and swipeable debit cards.

Payroll/deposits/bills: electronic transfer, though there still is a paper system for bills. But (nearly) everybody with an address (homeless who get some form of social security have some workaround method to get their payments – i.e. I know it exists, but I don’t have the details handy) has a bank account. There are bound to be people without them, but I’d really have to ask around to find one.
Also, up until about 10, 15 years ago, rules for credit cards were much tighter, so not many people even had one. I still know more people who do not have a credit card than people who do, even if they qualify for one. Banks don't push them very hard either - they do advertise them, but not as aggressively as I've seen for instance in England.

The system does have in mind using plastic without the pitfalls in credit cards. And umm, [Belgians] “... get that thriftiness thing from their northern neighbor” ? Guilty as charged… And in return, we drink their beer, are amazed by being separated by a common language, and make condescending jokes.

Ken Houghton said...

"Such as customers who don't have direct deposit, or who need that extra day to "float" the check, or who can't get a credit card but need to defer that purchase just a tiny bit."

Or those of us who just don't carry cash and forgot the credit card.

What Shainzona Said, btw. I moved my NJ account to NY temporarily and Chase decided that since I had a NY mailing address, I should pay a fee. Looking for a credit untion...