Everyone hates consumer lenders — politicians, consumer groups, prayer circles — except the people who use them. They tend to like the products — and favor continued access to them. And that is not, as University of Pennsylvania Professor Lisa Servon says, a symptom of Stockholm Syndrome on behalf of the financially marginal. As it turns out, even people without a lot of money need financial services — and in many ways, non-bank players are just making a better offering.
Payday loans and associated non-bank financial services are not popular products by the standard definition. Depending on which figures one uses, 3 percent to 5 percent of American consumers view payday lending or associated non-bank financial services like check cashing favorably.
That, according to Americans for Financial Reform, makes those products less popular among the average American than used car salesmen or Wall Street bankers. According to recent data from Pew Charitable Trusts, 70 percent of Americans want to see payday lending and non-banked consumer services reformed, and 80 percent believe they are too expensive as currently offered.
So everyone hates payday lending and views check cashing as inherently suspicious and predatory.
Well, almost everyone. According to the New York Federal Reserve Bank, there is one rather notable minority of consumers who rather like these products — the people who actually use them. For that group of 10 to 12 million consumers each year, payday loans are rather popular.
And, notes Professor of City Planning at the University of Pennsylvania and former dean at The New School, Lisa Servon, the divide between the opinions of people who use payday lending products and those from the outside looking in was curious to her. Because, she noted, it didn’t make sense that the use of these products is climbing rapidly year over year if it is as toxic and awful as it is so frequently described as being.
“I had done work in low-income neighborhoods for 20 years, and I knew that people who don’t have very much money know where every penny goes. So, that’s when I scratched my head and I realized there’s got to be more to the story,” Servon told PBS News Hour.
It’s a story she tried to tell in her book, The Unbanking of America — a story she researched by working in various parts of the non-bank financial services industry, including at a payday lender and a check cashing shop. And the reasons, she said, are neither illogical or hard to understand — consumers like payday lenders because they offer two things for those living close to the financial margin that can otherwise be hard to come by: consistent access and consistent transparency.
Access and Accessibility
As a rule, customers with savings don’t think of immediacy as a driving concern when it comes to funds. A check that goes into the bank that isn’t available for a few days doesn’t seem like a life-and-death issue, because the consumer presumably has other funds in the account.
The typical users of check cashing and payday loan services don’t live in that financial reality, Servon noted, which drives behavior that looks odd to someone living outside the underbanked or unbanked experience. She said, for example, that consumers would pay a $2 fee to take the last $10 off their electronic benefits card — meaning they only walked out of the store with $8 net.
“Well, the ATMs don’t give you $8 or $13 or $28. They give you multiples of $20, maybe $10, if you’re lucky, right? So, suddenly, something that seems illogical makes sense, because you realize that she needed that $8. She needed every dollar that she could get access to, and it was worth it to her to spend $2 in order to get it.”
Moreover, she noted, these customers often need more than just the funds in hand; they needs those funds to be distributed. The check cashers also act as the one-stop shop for a variety of financial services, including pre-paid cards, remittances to relatives overseas, paying bills or paying rent — and these services are often available 24 hours a day, 7 days a week as opposed to the 9-5 “bankers hours” that banks are generally open.
Even much-maligned payday lenders, she said, are filling needs for customers that are often non-optional. Consumers don’t buy luxury items with payday loans — they pay bills.
“We talk about getting rid of the lenders without recognizing that the demand is still there. And the demand is still there because we have had declining wages since the 70s. Income volatility has doubled over the past 30 years, so people have much less ability to predict how much money is coming into their household from week to week.”
And while the costs are high, and there is a genuine concern that access to more expensive credit is worse than access to no credit at all, Servon noted that for financial marginal consumers, access to funds are often expensive no matter where one turns, even if it is more traditional. The banks’ costs just may be less obvious.
Servon noted that while the fees charged for check cashing or wire transfers or even payday loans are high, they are a very known commodity. Signage is posted largely and brightly all over the locations — customers know exactly what they are paying to use their funds, even if it is more than they would like.
Banks can often be just as expensive — or more expensive — but not in ways that are quite as obvious.
“The signage that spans the teller windows looks exactly like what you would see at a fast-food restaurant like McDonald’s, and it tells you that it costs 2.03 percent of the face value of your check to cash it, $1.50 to pay a bill, $0.89 for a money order. All of that information is there.”
With banks, she noted, customers don’t have immediate access to funds, and checks can take a day or two to clear. If other expenses hit an account during that window, she noted, overdraft fees start at $35. And, she noted, 44 percent of banks still stack charges into accounts in an order that maximizes the number of fee overdrafts that can be charged. ATM fees, account service fees if a minimum balance is not kept up — banking can be expensive for marginal consumers, Servon said, and hard to trust, because the fees aren’t consistent.
This is not to say there aren’t issues or abuse. She explained that even within the industry, she’s heard people who work in payday lending refer to the business as offering “a lousy product.” But, expensive as it is, the Federal Reserve suggests the pricing is in line with the risks associated in lending to buyers with a high default risk — and it’s the only product speaking to a very prevalent market need.
Servon said payday lending takes into account the preferences of people who use these products, because assuming they’re irrational and don’t know what they want won’t help build better, cheaper or more relevant products going forward.