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A local bank, which my employer uses for payroll, is about to institute a policy where they will charge non-customers of the bank a $5 fee to cash a check drawn on one of their own customer's accounts. Is it permissible for a bank to not honor the full amount of their customer's checks, assuming the account has the funds, and the check is legitimate?

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    This is a service fee which you can pay any way you wish. One of those ways is to reduce the amount of cash given to you. It's honestly no different from from payroll debit cards that have exorbitant usage fees. Do what you can to use your own bank. – RonJohn Jun 29 at 1:13
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    The unbanked have been taken advantage of for decades. This is just one example. – JoeTaxpayer Jun 29 at 1:29
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    @JoeTaxpayer walking into a bank and cashing a check isn't inherently without cost from the bank's perspective. Either the unbanked or the banked are going to pay for it. Seems appropriate to me to charge the individual receiving the service. Of course, we can argue separately if $5 is appropriate to cover the bank's cost, or if it's just a marketing tactic to try to convince you to open an account there so you can avoid the fee. – dwizum Jul 1 at 13:02
  • Just to be clear, is the charge being assessed only if you cash the check at the issuing bank, rather than at a bank where you do have an account? – chepner Jul 3 at 14:41
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They aren't failing to honor the full amount, they are changing the non-customers a $5 fee.

If the payroll check is $999.00 and you aren't a customer, then you will walk out the door with $994.00, and your employer will still have $999.00 deducted.

You have several options:

  • open an account at that bank, and deposit the check into your bank account.
  • Take the check to your bank, and then deposit it into your account
  • get direct deposit, and have the check automatically deposited every payday.

If you do any of these you will end up with $999.00 in your account.

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In the US, the Office of the Comptroller of the Currency, part of the US Department of the Treasury, has given their official guidance on interpretation of related regulations in 2008 as Interpretive Letter #1094. Someone asked them if a specific bank could charge a check cashing service fee to a non-member, to which they reply (emphasis mine):

This responds to your letter of ... 2008, in which you request the confirmation of the Office of the Comptroller of the Currency (OCC) that ... (Bank) is authorized pursuant to 12 U.S.C. § 24(Seventh) and 12 C.F.R. § 7.4002 to establish and charge a fee to a non-accountholder customer for the service of cashing an official check (official check cashing fee). Based on our review of your letter and supporting materials and the relevant considerations set forth in our regulations, we confirm that the Bank may establish and charge an official check cashing fee to a non-account holder customer pursuant to section 24(Seventh) and section 7.4002.

In short, unless you are a lawyer looking to decide if this interpretation is correct and wanting to form a class action suit (good luck), banks can charge check-cashing fees to non-members. Regulations insist these must be basically reasonable, in that they are competitive and related to an actual cost of doing business for them. They can't charge $999 on a $1000 check as a clever way of trying to eliminate non-members from cashing checks in person, for instance. But the letter even explicitly calls out $5 to $8 fees as typical and acceptable - read more for the full reasoning and legal opinion if you would like to know more.

The simplest reasoning for why this is acceptable is that checks are an insecure form of payment. They are excellent instruments for fraud, being easily printable at home, washable (even back when home printing wasn't common), trivial to alter or reproduce, and in their common form once you've seen one check you can produce an endless supply just like it with no way to tell it is fraudulent (check numbers are not crytographically secure one time pads, for instance, they are just counters). Most forms of US IDs are not especially difficult to fake any more either, especially as overseas professional distributors exist now with easy internet access to their sites (at the risk of dealing with online fraud, which I suppose is fitting).

Thus showing up at a bank with ID and a paper check in hand is something that banks would generally rather not deal with if they can avoid it. There is far more recourse available between banks, and fraud can be shut down more quickly as the amount of effort required to open and verify bank accounts is vastly beyond showing up in person with a check.

Of course, another motivation is "because money" - banks want to collect as much money as they can figure out a way to get away with! People get paid very well to think up new and clever ways to charge fees in ways that don't violate national regulations, and they still today engage in many questionable practices that have been bouncing around courts for years, like reordering transactions.

The only way to avoid this is to seek a cheaper check-cashing solution, and the cheapest generally requires you have a bank account of your own and use them for check cashing. Lots of banks offer online check cashing services using only your smart phone and no visit to a branch, so that's an option. If you can't do that, you can look at other local check cashing options like the grocery store and stores like Walmart (some of the few that will still deal with these situations), but a $5 flat fee ends up being hard to beat anywhere on checks above $500.

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Perhaps it would help you understand if you knew the reason for the fee.

You might be under the assumption that the bank has no risk in this situation, because the checks are being drawn from the bank's own customer (the employer), and they can verify that the account indeed has money in it before handing it out to a non-customer employee.

However, what if the non-bank-customer "employee" turns out to be a scammer? They might present a counterfeit check, or they might have stolen a real employee's check and are trying to cash it. In that case, the bank would have to return the money to the employer's account.

When a bank has no relationship with the person cashing the check, they have little recourse if they later find out that the person who received the money was not entitled to it. They can mitigate this possibility by asking for ID, but there is still a chance that the bank will have to pay the employer back this money and will have no way of recovering it from the crook.

Because of this risk, they charge non-customers a fee when they cash a check, and collecting all of these fees will offset the occasions when they lose money to a thief.

To avoid the fee, you simply need to open an account with the bank. When you do this, you will give the bank your identity and contact information, which reduces the bank's risk that you are a crook.

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