"Poverty, Race, and the Two-Tiered Financial Services System,"by Robert D. Manning July/August 1999 issue of Poverty & Race
Those on the margins of Clinton’s “economic miracle”–the working poor, the very poor, minorities, immigrants–encounter a financial services system markedly different from what is offered to middle- and upper-income, largely white consumers. This “second tier” system includes check cashing outlets, pawnshops, rent-to-own stores, car title pawns and “cash leasing operations,” all of which charge usurious, but largely hidden, interest rates. In these murky waters of fringe banking, corporate loan sharks feed on their hapless victims with virtual impunity. Indeed, while middle-class demands for government regulation are frequently heard following reports of billion dollar bank profits from ATM fees or “excessive” interest rates on 22.9% APR credit cards, politicians have largely ignored the complaints of the working poor whose cost of credit commonly exceeds 20% per month!
Where Did the Banks Go?
The deregulation of the U.S. banking industry, an early objective of the “Reagan Revolution,” has been a striking success for its corporate beneficiaries: industry concentration (uncontested corporate mergers and acquisitions such as the union of Citicorp and Travelers Bank), enormous bank profits (highest in modern history), proliferation of automated services (resulting in large-scale layoffs of low-wage workers such as tellers), and the systematic dismantling of interstate banking regulations (Depression-era Glass-Stegall Act) and restrictions against “cross-selling” of diverse financial services (Morgan Stanley Dean Witter conglomerates). For affluent urban neighborhoods and white suburban middle-class communities, financial deregulation has produced a proliferation of new bank offices and financial products (at moderate albeit steadily rising prices), whereas for the working poor it has resulted in the closing of many local neighborhood banks, especially central city branches (intensifying assault on the 1977 Community Reinvestment Act), and corporate penetration into the most lucrative sector of financial services or “poor people’s banks.” This latter phenomenon mirrors the corporate shift from overt (“redlining”) to covert (replacing first-tier with second-tier banks) financial discrimination which generates billions of dollars annually in corporate profits. The direct and indirect linkages between fringe banks and major financial corporations such as Bank America, Fleet Financial, Ford, Nations Bank and Western Union include providing profitable lines of credit, purchasing publicly traded stock, and “flipping” or buying high interest loans from small companies for a small percentage or “finder’s fee.” Undoubtedly, the U.S. government’s shift to paperless financial transactions next year will force those excluded from top-tier banks to cultivate new and more costly relations with the corporate surrogates at the bottom of the financial services system.
The most distinguishing feature of fringe banks is the high cost of consumer credit. As the accompanying table shows, based primarily on fieldwork data from metropolitan Washington, D.C., the annual percentage interest rate (APR) of most unregulated financial services is from 180% to 360%, with the exception of “cash leasing” at 730% APR. Beginning with check cashing operations, their services include cashing payroll or government checks at 1.25%-2.0% of the face value (essentially a 2-3 day loan at an APR from 152%-365%); “payday loans” from check cashing stores and pawnshops for a maximum of $300 at 15% (365% APR) which are transacted as post-dated checks (2-3 days to 2 weeks); and tax return loans (10% for approximately 10-15 day loan, or 240%-360% APR). Overall, the annual cost of “fringe” banking services (check cashing, money orders, utility payments) is $199 for take-home pay of $10,000, rising to $313 for $16,500, and jumping to $444 for household take-home pay of $24,000. By comparison, the annual cost for a traditional checking account with less than a $300 minimum balance was about $60 per year in 1991 and is nearly $100 today.
Although industry reports generally explain the preference of patrons for using check cashing outlets as primarily due to convenience (location, extended hours), interviews reveal that it is the policies of first-tier banks that drive lower-income, working-class and immigrant clients to more costly check cashing outlets such as corporate America’s Cash Express, Inc. and the dwindling number of small mom-and-pop stores. These policies include costly returned check fees and required documents such as utility bills and payroll check receipts. Additionally, these consumers express a distrust of financial institutions, among immigrants concern over inadequate English skills, and fear that financial transactions will be tracked by government and corporate agencies.
The most popular source of collateralized credit is pawnshops. Their popularity is due to confidentiality, quick access to small sums of money and lack of impact on one’s personal credit history if delinquent in redeeming pawned items. Significantly, state regulations limit interest rates on pawned items to 5% per month in both Virginia and the District of Columbia (60% APR), while Maryland rates range as high as 20% per month (240% APR).
Like the first-tier, small pro–prietorships are being devoured by rapidly growing national and international corporations such as Famous Pawn and Cash America, whose performances can be monitored by their stock valuation. During the sharp vacillations in economic conditions in the late 1980s and early 1990s, the number of pawnshops climbed from about 5,000 in 1985 (concentrated in the urban Northeast) to nearly 9,000 in 1992 (across the U.S. but especially in the South), while the number of check cashing outlets jumped from about 2,000 to almost 5,000 during this period.
The growing popularity of two other sources of credit merit attention. Rent-to-own stores like corporate chains Rent-A-Center and Rent America have expanded to satisfy the consumption demands of the working poor, those recently entering bankruptcy, divorced persons, students, new immigrants, government assistance recipients and those living in the informal economy. The most popular merchandise include stereos, TV/VCRs, sofas, dining sets, kitchen appliances, bedroom furniture, washer/dryers and jewelry. Rent-to-own stores appeal to those seeking instant gratification, those with unstable lifestyles, and those participating in the cash-only economy. Weekly payments tend to obscure usurious interest rates; same day delivery and return policies appeal to those experiencing recent lifestyle transitions such as eviction or divorce; and high-pressure sales staff are trained to prey on low-income consumption desires. Most items are leased on a rent-to-own basis, but no equity is accumulated until the entire principal and all interest is paid in full. As a result, with APRs typically ranging from 180% to 360%, few clients pay off their purchases. An example of rent-to-own economics, using data from a Rent-USA and Circuit City store in suburban Maryland, both accessible by public transportation: A new 19" Magnavox TV lists for $195.99 at Circuit City and will cost $233.37 if financed with the company’s own credit card (less if the customer uses a personal bank credit card) for 78 weeks; at Rent-USA, the same model television set will cost $779.22 after it is finally paid off, 78 weeks later.
The most expensive credit offered by corporate loan sharks is the “cash lease” scam of companies like “Cash-to-You.” In order to evade state usury laws, money is technically “leased” rather than loaned, at the cost of 30% per 15 days. A maximum of $300 can be leased at any time. Clients must have an active checking account and verify ownership of at least three electronic items, such as stereo, computer or television. Aggressive radio and print advertising targets low-income and economically distressed groups, with particular attention to maxed-out, lower income, working-class minorities and, more recently, to college students, with the emphasis on “helping you out” during those “cash crunch periods.” Information will not be sent through the mail; application must be made in person at their offices. The APR is an outrageous 730%.
Corporate Loan Sharks
Recent research on fringe banking has documented its rapid expansion and spiraling costs. However, these general trends obscure important and largely under-examined dynamics within the broader stratification of the fringe banking sector. The growth in number of the working poor and the economic distress of the middle-class “squeeze,” together with increasing corporate penetration and consolidation, have created tremendous variation in costs of services and types of sales merchandise by social class of clientele–even among stores owned by the same company. In the network of unregulated Maryland pawnshops, for example, stores that cater to largely working-class, Latino immigrants charge a monthly interest rate of 20% on pawns and 15% for two-week “payday” loans, while the same corporate pawnshop a few miles away charges 10-15% (depending on relationship with patron) on pawns to its middle-class customers and 12% for two-week “payday” loans.
The social and economic integration of second-tier financial services underscores the spiraling cost of credit for the most economically disadvantaged. That is, inflated finance charges dramatically increase the cost of living in neighborhoods with large numbers of low-income and minority residents. The credit strategies of the working poor are becoming more complex than can be possibly understood by examining discrete segments of the fringe banking system. As long as corporate loan sharks are not effectively regulated, the most economically disadvantaged will find themselves ensnared in new forms of debt peonage relationships. In the process, low-income and minority households will continue to depend on money orders rather than personal checks, pawnshops rather than credit cards. It is these linkages among poverty, race and corporate profits that underscore the social costs incurred by the rampaging bulls of Wall Street.
Robert D. Manning is Visiting Professor of Sociology and Latin American Studies, Georgetown University and 1999-2000 Distinguished Research Fellow, Center for Immigration Studies, Washington, D.C. His book, Credit Card Nation, published by Basic Books, and his credit card education/financial literacy modules and research reports are available at www.creditcardnation.com. In collaboration with Consumer Federation of America, he is assisting in the organization of a national, grassroots campaign against the pervasive influence of credit card companies on college campuses. email@example.com
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