ACE Cash Express, Inc.

1968–1999

ACE Cash Express, Inc. is the largest owner, operator, and franchiser of check-cashing stores in the United States. In addition to its booming check-cashing business, ACE offers a range of other services, such as small consumer loans, money orders, wire transfers, and electronic tax and bill payment. ACE also sells pre-paid phone cards, auto insurance (in conjunction with Instant Auto Insurance), and pre-paid Internet service (with ePOWER International). The company has grown considerably in recent years, doubling the number of its stores to 960 spread among 29 states between 1994 and 1999. A publicly traded company since 1993, ACE has labored to overcome the popular preconception that the check-cashing business is a sordid industry exploiting the poor and disadvantaged.

Early History of Check-Cashing Industry

Check-cashing stores existed long before ACE Cash Express, Inc. emerged as the industry's leader. The first such businesses sprang up in the 1920s when a number of companies began to pay their workers with checks instead of cash. Depression-era Americans were loathe to deposit their paychecks in the nation's failing banks, and instead opted to cash their checks in neighborhood outlets that charged a small fee for such services. After the Federal Deposit Insurance Corporation (FDIC) was created to place a safety net under individual bank depositors' assets, the average worker came to rely less on check-cashing businesses.

Adapting to this trend, check-cashing stores began to carve out a niche serving those who could not--or would not--obtain bank accounts. Often located in inner-city areas, these stores charged a fee to cash government or payroll checks for their clients. The entire industry was, in large part, unregulated, with some businesses exacting as much as 20 percent of the check's face value as a 'service fee.' Check-cashing stores typically conducted other transactions as well, including the sale of money orders, lottery tickets, and public transportation tokens.

ACE's Origins: 1968-85

ACE's roots stretch back to 1968 when MoneyMart was founded in Denver, Colorado. By the early 1980s, MoneyMart operated a sizable network of 70 check-cashing stores in Colorado and in Dallas and Houston, Texas. This degree of consolidation was rare in the check-cashing industry, as most businesses were owned individually. Yet more was to come. In 1984, Associates Corp. (a division of the financial services giant Gulf + Western Inc.), acquired the MoneyMart chain to complement its thriving money order business. After renaming the stores Associates Cash Express in 1984, Gulf + Western added 20 new stores to the chain by 1985. By 1986, Associates was by the far the biggest name in the industry.

By 1990, ACE reported revenue of $16.6 million.

1983–1991

That same year, two Gulf + Western executives recognized Associates Cash Express's prodigious revenue-generating potential. Wallace Swanson and Don Neustadt (then the president of Associates Corp.'s wider money-order operations) joined together with a group of private investors to acquire the entire Associates Cash Express division for approximately $5.5 million. Rechristened ACE Cash Express, the now-independent company concentrated on maintaining its sizable lead in the burgeoning check-cashing market.

Although still burdened by an unsavory reputation, the check-cashing industry was flourishing nonetheless. Fueled in large part by the deregulation of the financial services industry in the early 1980s, check-cashing outlets laid claim to a growing number of customers. Deregulation had increased competition in the American banking industry, and as banks cast about for more profitable ways to do business, many began charging for basic services such as check cashing, thereby deterring many potential lower-income customers who could not or would not pay such fees. Exacerbating this trend was the fact that most banks went so far as to refuse to cash checks for those without an account at the bank (even for government-issued checks), and many raised the fees they charged to provide checking accounts, or levied penalties on accounts that dipped below a minimum balance. Moreover, as they sought further cost-cutting measures, banks closed less profitable branches in low-income neighborhoods, leaving whole classes of people without easy access to mainstream banks.

According to US Banker, the result of these industry shifts was a 'service vacuum created by the banking industry itself.' The Federal Reserve estimated that one-fifth of U.S. households did not have a checking account in 1983 and that 36 percent of those with annual incomes below $8,400 had neither a checking nor savings account. Check-cashing businesses filled this banking void by providing services for those who did not have a checking account at a bank. In addition to cashing checks for a fee, these stores sold money orders with which clients could pay bills.

Expansion: 1988-97

From its inception, ACE had to find its way in this shifting financial services landscape. Even more tumultuous was the fact that the company quickly had to fend off a 1987 takeover attempt by Cash America International Inc., a network of pawn shops eager to augment its operations. The publicly traded Cash America eventually abandoned the acquisition because of concerns on Wall Street that the company was venturing too far afield from its core pawn shop business. In the aftermath of Cash America's bid, ACE president Don Neustadt and chairman and CEO Ray Hemmig made expansion the company's top priority in an effort to maintain ACE's leading position in an increasingly competitive industry.

Consistent with its focus on growth, ACE opened 52 new stores between 1987 and 1989. By 1990, ACE reported revenue of $16.6 million. Although its operations were still highly concentrated in Texas and Colorado, the company also searched for opportunities to enter additional markets. To this end, ACE sought to acquire Check Express, another large check-cashing chain, in 1991. Strongly positioned in the southeast, Check Express offered ACE a foothold into new regions. The deal was rejected, however, by Check Express's board of directors in November 1991. ACE's sales for the year rose to $20 million nevertheless.

1987–1998

Spurned by Check Express, ACE opted to fuel its growth with a public stock offering instead. In December 1992 the company sold 1.5 million shares (earning $15.3 million in the process), and then launched an ambitious store-building plan early in 1993. Although it had been opening an impressive average of 30 new stores each year since 1987, the company planned to increase that number to 50. In fact, as Hemmig revealed to the Wall Street Transcript in 1993, 'We hope to double the size of our company in the next five years.' ACE's agenda was twofold. In addition to venturing into new regions, it sought to bolster its presence in its current markets. 'Our game plan is to cover a market from north to south, from east to west,' Hemmig told the Dallas Morning News. Moreover, despite the difficulties it had experienced with the Check Express deal, ACE did not forego acquisitions. In November 1993 ACE successfully purchased Mr. Money--a 23-store check-cashing chain well established in Georgia--for $4.1 million. By the year's end, ACE's roster of check cashers had grown to more than 300, and it had locations in ten states and the District of Columbia and was more than twice the size of its nearest competitor. Even more impressive were the company's soaring sales, which rose to $32.7 million in 1993, as well as its net income, which surged 62 percent the same year.

ACE's expansion strategy was not limited to opening new stores, though. The company also developed new services in an effort both to raise revenue and to win the repeat business of its clients. In 1990 ACE had introduced electronic tax filing, which proved popular among customers willing to pay a fee to receive quicker tax refunds. By 1993, tax filing had become ACE's third largest revenue source, trailing only check cashing and money order sales. Also in 1993, ACE entered the nascent pre-paid services market, when it began to offer pre-paid long distance phone cards at its check-cashing stores. Nevertheless, check cashing remained the staple of ACE's earnings, accounting for about 90 percent of its business. To minimize its risk from check fraud, ACE implemented a $2.5 million computer point-of-sale system in 1993, linking each store to the company's headquarters. The system also allowed ACE to track its consumers' transaction histories. 'It gives us a greater control of the business and the ability to anticipate trends [in] customer behavior,' Hemmig explained to the Dallas Morning News.

Despite its steady gains in sales and profits, ACE's stock prices had remained low as a result of the industry's negative reputation. As an anonymous check casher told the Los Angeles Times, the industry had a 'bail bondsman image.' To counter-balance the notion that check cashers gouged the poor to provide basic services, ACE took care to project a more positive image. Its green and white facade stores were clean and well lit, with the prices charged for various services prominently displayed, much like menus in fast food restaurants. Company officials stressed ACE's convenience and its array of services. ACE also emphasized its non-check-cashing services to help boost its image.

ACE's efforts to burnish its reputation were assisted by significant changes in the check-cashing industry as a whole. As the savings rate of the average American plummeted to an all time low, a greater number of families was saddled with hefty credit card debts. Increasingly, check cashers' prime customers were no longer the urban poor, but rather 'white-collar job holders who use their services to make ends meet,' according to the Cincinnati Enquirer. So-called 'payday' loans--in which check cashers allowed a customer to write a post-dated check and cash it on the spot for a fee--became an important aspect of the industry. As a result of the changing client base, check cashing outlets became more prevalent in suburban areas. Like its competitors, ACE reported that its most rapid growth by the mid-1990s occurred in suburban roadside shopping malls.

With its growing customer base, ACE was able to expand both its geographical presence and its range of services. In 1994 the company introduced ACE Bill Pay, which allowed ACE's walk-in customers to pay utility and other bills on the premises for a small fee (an arrangement not unlike the relationship between Mailboxes Etc. and the United States Postal Service, where the private company essentially acts as an intermediary and charges a premium for doing so). In December 1994 the company made two major acquisitions--of ChecksFirst Corp., a 19-store chain in Oklahoma, Arkansas, and Louisiana, as well as the four-store Check Cashers business. Sales in 1994 rose to $39.9 million. More acquisitions followed in 1995, when ACE purchased the 31-store Quick Cash Inc. chain. In October ACE finally added Check Express to its empire. The Check Express transaction proved especially important, since that firm had by then become the largest franchiser of check-cashing stores in the country. To augment its numerous acquisitions, ACE opened 117 new stores in 1995. Sales for the year topped $47 million. Guided by Check Express's expertise in franchising, ACE began to franchise the ACE name to check-cashing centers nationwide. A total of 105 new stores (including franchises) opened in 1996 and 120 opened in 1997. ACE reported a record-breaking $87.4 million in sales in 1997.

New Services: 1998 and Beyond

1998–2000

Despite its leading position in the check-cashing industry, ACE faced a number of challenges in the late 1990s. Its competitors had taken note of ACE's accomplishments and adopted similar, expansion-focused strategies. By 1998, as a result, one-third of the nation's 6,000 check-cashers were owned by six companies. In addition to heated competition among businesses in the field, the industry was confronted by the rise of paperless transaction, which threatened to erode check-cashers' most important business--cashing checks. This new phenomenon was alarming to check-cashers because it threatened to do away with checks entirely, distributing funds through electronic transfers instead. But it also proved popular with the public: a number of U.S corporations implemented direct payroll deposits, and the federal government began to explore the possibility of implementing an Electronics Benefits Transfer system, whereby benefits such as Aid to Families with Dependent Children (AFDC) and social security would no longer be issued with checks but would instead be directly deposited into bank accounts.

As a result of these changes, ACE redoubled its efforts to develop non-check-cashing services, shore up its business with existing customers, and reach new customers. In a ploy to win customer loyalty, ACE issued the industry's first-ever frequent user card in 1998. The company hoped this would prove to be a popular feature since status 'isn't often conferred on our customers,' an ACE executive told Fortune magazine. By June 1998, the company had issued more than four million of these Gold Cards. In 1998 ACE reached an agreement with retail giant Wal-Mart to open ACE outlets in 32 Wal-Mart stores.

The pace of ACE's diversification quickened in 1999 and 2000. That year, ACE linked its Gold Cards to check-cashing terminals that doubled as ATMs. Also in 1999, ACE teamed up with Instant Auto Insurance (IAI) to provide auto insurance to customers. Moreover, ACE forged an alliance with Travelers Express Company to expand on its Bill Pay system. Beginning in 1999, ACE offered its customers the ability to pay all their bills at a single store (including mortgages and car loans). The service was the first universal bill-paying system in the United States available to walk~in clients.

More important, ACE also joined forces in 1999 with Goleta National Bank (a unit of Community West Bancshares) to strengthen and safeguard its "payday" loan operations. Several states had passed legislation banning the practice of "payday" loans because they deemed the annual interest rates on these small, short-term loans (which often exceeded 400 percent) to be usurious. To circumvent these anti-usury laws, ACE would leverage its relationship with Goleta to provide such loans in states where they were outlawed. Under the terms of the agreement, ACE would merely process "payday" loan applications, but Goleta--headquartered in California where the practice was legal--would actually issue the loans. (ACE would later buy back a portion of the loans.) According to the Wall Street Journal, ACE's maneuver would most likely provide "a big boost to the company's earnings and sales."

As a result of its consistent attempt to increase its services at the same time that it continued to add to the number of outlets in its network, ACE ended the 20th century with excellent future prospects. Its sales had risen to $122.3 million in 1999, and its net income had climbed 35 percent. In addition to owning and operating 817 stores, ACE had added 147 franchised stores to its system. Its stock prices also had risen to all time highs. In keeping with its goal of diversifying its operations, ACE could boast at the close of 1999 that it no longer relied exclusively on check cashing to sustain sales. Indeed, by the year's end, check cashing accounted for only 55.8 percent of sales (compared with 90.7 percent a decade earlier).

ACE continued to pursue new market niches. After Jay Shipowitz ascended to the position of president in 2000, the company announced that it had reached an agreement with ePOWER International (a privately held Internet technology company) to provide prepaid Internet service through ACE. "Offering this service to our customers moves ACE closer to providing a complete line of financial-related services needed by every household," Shipowitz proclaimed in a press release.