The statistics are clear. The market has spoken, and it likes check
cashing services and payday, title and pawn loansor at least
a significant portion of the market does. The rest of the consumer
market looks at their comparatively high costs, scratches its collective
head and wonders, "Why?"
The reasons why people use fringe banking services are a complex
web of financial desperation, product convenience, target marketing
and a healthy dash of consumer naivete.
For starters, most customers "have severely impaired credit" and
have little or no savings to fall back on, according to John Caskey,
a professor at Swarthmore College. Despite the fact that most hold
full-time jobs, such households have trouble weathering small financial
crises, and past financial mismanagement means their sources of
credit might also be limited.
Banks, for example, don't typically make the $200 loans common
among payday lenders. Given poor credit histories, credit cards
can also be difficult to obtain (and, in fact, can be the original
source of financial problems). Caskey's research has found that
about half of all customers of fringe bank outlets have credit cards.
Third-party research of a large title loan company with offices
in the Ninth District found that less than one-quarter of the company's
customers had credit cards, and just one in 10 had a general use
bank credit card (rather than a gas or retail credit card).
Getting a payday loan also requires little more than an open checking
account, driver's license, proof of a job and a phone bill to confirm
residency. Stores are often open longer hours than banks; some check
cashing outlets are open 24 hours a day. Although banks offer increased
convenienceATM, phone and Internet transactionssuch
a model is also decreasing the industry's reliance on labor. In
contrast, the high-volume, low-value (per transaction) market of
nonbank financial services has created a labor-intensive, face-to-face
model that puts a premium on friendly customer service, several
Despite their high costs, filling a financial shortfall with a
payday or title loan can also be cheaper in the short-term than
bouncing checks. A single bad check, regardless of value, typically
runs at least $30 after adding in both bank and merchant fees, and
can go as high as $50. Multiply that by several checks without proper
backing and payday and title loans can be much cheaper if paid off
on time and assuming the cash shortage is unavoidable.
Bank fees are also increasing. In a recent report to Congress,
the Federal Reserve found that in 1999 "the level of fees at banks
increased significantly" in nine of 21 cost categories, and went
down in just two over the previous year. It found that the number
of banks offering free, noninterest-bearing checking accounts dropped
from 18 percent to 11 percent, while bank fees for stop-payment
orders, nonsufficient fund checks, check overdrafts and returned
deposits all went up between 4 percent and 6 percent. The rate increase
for these three fees went up between 8 percent and 17 percent in
Minnesota and between 12 percent to 20 percent in Wisconsin, with
per-charge fees in each state ranging between $11 and $18.
Marketing, price sensitivity and delayed gratification
Critics charge that companies make services and productsparticularly
payday loanstoo easy to obtain, and fail to be upfront and
truthful about the full cost of these transactions in their advertising
"You won't find a yellow page ad that says 'We have 400 percent
APR, come on down,'" said Jean Ann Fox of the Consumer Federation
of America. "These are advertised and marketed as one-time, cash-flow
management [loans], when in fact these turn out to be the first
step of a slippery slope" of personal debt.
In some cases, customers might not fully understandor care
to understandthe long-term or comparative costs of these products,
according to Gary Preszler, North Dakota banking commissioner. "They
want to know what the payment is. They don't care about the rate
or what the ultimate cost of the loan is," Preszler said. "They
don't weigh the consequences."
But given a customer base in the millions, even consumer advocates
admit that not all customers are being duped or tricked into these
transactions. As such, price insensitivity appears to play a big
role in people's decision-making. A report on the payday industry
by an investment banking firm said customers primarily use the service
"due to their unwillingness and/or inability to delay consumption.
... Consumers are often convenience driven, not price driven, when
it comes down to choosing between immediate consumption vs. delaying
To many, consumer education on financial matters is often lacking
and compounded by a society fixated on immediate gratification.
"Today, it's instant. You want it and you have to have it now,"
said Jim Rhodes, education director of Metropolitan Financial Services/Auriton
Solutions, a nonprofit that counsels "people who've hit [financial]
Rhodes called payday loans a "dangerous" product, but acknowledged
that credit cards, high-interest auto loans and other subprime credit
products play a bigger role in the debt structure of Metropolitan's
Metropolitan gets 4,000 calls a year, and on the day contacted,
had received 173 calls by mid-afternoon. "We can't handle the business,"
Rhodes said. "If there's a downturn in the economy, you ain't seen