Starting your own check cashing business can be a highly profitable endeavor if properly executed. And for anyone hoping to simply add check cashing capabilities to their current business, doing so can yield good will with customers who are underbanked or lower-income – making it useful for all types of merchants.
Since companies who provide check cashing services are classified as money service businesses (MSBs), you’ll need to perform your due diligence if you wish to stay compliant with federal anti-money laundering regulations like the “Know Your Customer” provision of the U.S. Patriot Act.
Not to mention, verifying and cashing checks is considered a high-risk merchant activity by financial regulators. This means that you’ll need to take certain precautions, educate yourself, and find an able and willing payment processor to help you keep the doors open.
Ready to begin? This article will teach you everything you need to know about verifying and handling checks as an MSB.
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Table of Contents
Primary Types of Checks
There are almost as many types of checks as there are types of transactions. In this section, we’ll explore some of the most common types of checks you’ll encounter when verifying a check.
#1. Payroll Checks
A payroll check, also called a “paycheck,” is issued by an organization to employees and contractors in compensation for services rendered to the organization. Paychecks are usually provided on a regular basis: often monthly, bimonthly, or weekly.
It should include the printed name of the organization and the relevant employee, the amount, an authorized signature, the total amount spelled out and written numerically, as well as the date and account number.
#2. Personal Checks
A personal check is used to allow individuals to make a payment to others, using money from their personal checking account at a bank. The check includes the names of the payer and payee, as well as the amount of the check, the date, and the payer’s signature.
#3. Traveler’s Checks
A traveler’s check is a check that has been prepaid by the bearer and is used in place of hard currency. In the past, traveler’s checks were commonly accepted by many businesses in the U.S. and worldwide; however, their usage is declining due to the popularity of credit and debit cards.
#4. Treasury Checks
A treasury check is a check that has been issued by the U.S. Treasury. They are most often used in the event of tax refunds from the Internal Revenue Service.
#5. Cashier’s Checks
A cashier’s check is a check that has been guaranteed by a bank or credit union, that will be paid by that institution as well. The check is funded by money that has been transferred from the purchaser’s checking account to the bank’s escrow account.
Cashier’s checks are often used for purchases that are too large for a credit or debit card, such as real estate transactions.
#6. Money Orders
While they aren’t technically checks, money orders are worth mentioning here because they are often used the same way.
Money orders are very similar to prepaid checks such as cashier’s checks, but do not have to be obtained from financial institutions such as banks and credit unions. Instead, money orders are offered in a greater variety of locations, including post offices and grocery stores.
4 Keys to Getting Your MSB Started
Similar to starting up other businesses, running an MSB requires some planning to ensure its success – and even then there’s no guarantee you’ll be profitable. Here are the four keys to getting yours up and running:
Key 1: Learn the Ins and Outs of the Industry
To be clear, you don’t need to become an expert in the money service business industry to succeed as an MSB owner. However, if you don’t know how to properly verify a check, you’re going to encounter some problems.
There are also many regulations you’ll need to understand as well. The U.S. government considers MSBs suspicious, and in general more susceptible to money laundering than an ordinary company. You’ll need to understand these rules and laws if you’re to have any chance of keeping the lights on.
You’ll also need to register with the IRS. Your activities will be closely monitored, so prepare yourself to field questions from the authorities whenever the occasion arises.
Key 2: Create a Business Plan
Make sure you invest time into your business plan, because it will set the foundation for your success (or failure).
The best business plans outline your marketing strategy, upfront costs, future projections, and more. If you’re not sure how to make your own, read up about them online or download a customizable template and tweak it to your exact specifications.
Key 3: Find a Payment Processor You Can Count On
Arguably the most difficult aspect of running an MSB is keeping a bank account open. Deemed extremely high risk by banks and payment processors due to a variety of reasons (fear of numerous chargebacks, unreliable target demographic, money laundering to name a few), being able to process checks can be a real challenge.
Making sure you find a reliable payment processor that specializes in MSBs is the most important part of succeeding in this industry. Do your research ahead of time to find the best rates, and you’ll be in prime position to start your business.
Key 4: Acquire the Necessary Capital
Unless you’re personally wealthy, there’s a good chance you’ll need some money to get the ball rolling.
Acquiring capital will allow you to set up shop (whether running an online business or brick-and-mortar enterprise), and get things going.
How to Verify a Check: 3 Main Steps
Learning how to check if a check is valid is more important than ever these days – something that can be largely attributed to a rise in counterfeit cashier check scams.
When such a scam occurs, the victim is given a fake cashier’s check and told to cash it; sending some or all of the money to the scammer. After the check bounces in a few days, the victim is responsible for covering the missing funds.
With so many different types of checks out there, it can be hard to separate the real ones from the fraudulent. Check cashing providers and MSBs can’t afford to be fooled by counterfeit checks. To make sure that you aren’t being ripped off when cashing the check of a customer, closely follow the steps below.
Step 1: Look for physical irregularities.
Counterfeit checks come in all forms, from the convincing to the laughably fake. First examine the check by looking at its edges. If it’s a personal check, it likely comes from a checkbook and should have one perforated edge. However, other types of checks may have been printed on a computer, so this isn’t a foolproof sign of fraud.
Next, feel the paper that the check is printed on. It should feel slightly heavier than standard copier paper. Hold it up to the light and look for security features such as watermarks.
Third, the check should have a bank logo indicating where the payer has a checking account. Verify that this is the correct logo for the bank, and that the logo isn’t blurry or faded.
Step 2: Confirm & reconfirm the payment details.
The information listed on the check should correspond with everything that you believe to be true about the transaction. Confirm that the payer’s name and address are valid, and that they make sense for the transaction.
If the payer is a business, you can use services such as the Better Business Bureau to find information about the organization.
Then, examine the check’s signature. It should look authentic, and the name should match the identity of the payer. Fake signatures may have a shaky or digital appearance.
Finally, look at the check’s number and MICR line. The MICR line at the bottom of the check contains the routing number, the account number, and the check number. The number of the check in the top right hand corner should match the final string of digits in the MICR line. An MICR line with raised or shiny ink is a likely indicator of a fake check.
Step 3: Contact the bank.
To verify that the check is real and that the account contains sufficient funds, you should get in touch with the bank or financial institution that issued it. Keep in mind that a fake check may have incorrect contact information for the bank, so do your own research to find the correct phone number for customer service.
Once you have someone on the line, ask them to confirm whether the account contains the funds necessary to cash the check. However, not all banks will be willing to provide this information over the phone. What’s more, the availability of funds in the account may change between the time that you call and the time that you cash the check.
The safest way to confirm that funds are available and that the check is valid is to go in person to the branch of the bank that issued the check.
How Long is a Check Valid?
Even checks that aren’t counterfeit can be invalid if too much time has elapsed since they were signed. According to the U.S. Uniform Commercial Code, banks are not obliged to cash personal checks that are older than six months from the date listed on the check (but they may still do so if they wish).
Other types of checks have different lifespans:
- U.S. Treasury checks can be cashed up to one year after being issued.
- The expiration date of cashier’s checks depends on the bank that issued them.
- Traveler’s checks never expire.
If you have a check older than its recommended expiration date, it’s wise to ask for the check to be reissued to avoid complications when cashing it.
From the different types of checks to the possibility of fraud, there are many different concerns that you need to consider when verifying a check. By learning even the basics of check verification, you’ll be putting yourself in a much better position for success.
Setting up a high-risk merchant account for purposes such as check cashing can be difficult or impossible without the right payment processing partner. Thinking about starting a check cashing business, or just want to know your options? Contact us today for a free consultation with our team of payment processing experts.