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The High Cost of Poverty: Fringe Banking

Audio Report (6:56) Real Audio 14.4

First in a Series

Minnesota Public Radio's John Biewen reports.

((Sound... street))

Tifton is a town of about 17-thousand in south Georgia's cotton country. It's the seat of Tift County, where in the last census 23-percent of the population lived below the poverty line. Celeste Sneed is a single mother who works part-time at the local Prestolite spark plug factory. She says she would work full-time if she could get the hours.

((Sneed: "I make five dollars an hour. One week I pay my rent, one week I pay my light bill. And I got two children, you know. My daughter chose to live with her father 'cause he had so much money, you know, mother didn't have nothin."))

Sneed has no bank account and no credit cards, so when she needs a few extra dollars to get through until payday, she walks to Ace Pawnshop on Tifton's main street. She pawned her television set for thirty dollars two months ago. Many northern states limit pawnshop interest rates to 3-percent a month, or 36% a year. In the south, laws are much more lenient. Georgia allows the highest pawnshop interest rates: 25-percent a month, or an annual equivalent of 300-percent -- although the rate drops in half after three months. Celeste Sneed pays interest of 7-dollars and 50 cents a month on her 30-dollar loan, compared with the fifty cents a month she'd pay if she owed 30 dollars on a 20-percent credit card. When asked about the interest she's paying on her pawned television, Sneed can't quote a figure.

((Sneed: "It's not no high rate. I mean I can live with, deal with it. All my friends, like I told them, you know, if you got anything -- you know, cause there's gonna come a time when you're gonna fall -- you got anything, Ace is the place to be."))

((Sound... creaking door, store ambience, TV....))

((Jordan: "OK, come on in Miss Celeste...."))

Sneed made one interest payment last month; that prevented the pawnshop from putting her TV up for sale. Now she's past due on her next payment... and she's come to ask the owner of Ace Pawn, Becky Jordan, for extra time.

((Sneed: "You know, I didn't come and pay but one time." Jordan: "Right. When you gonna come pay?" Jordan: "Let me come in Friday. You know ...."))

Becky Jordan and her husband have owned Ace Pawn for 25 years. Despite her shop's high interest rates, Jordan claims she makes less money than she once earned as a school teacher.

((Jordan: "No, you don't get rich. I think maybe years ago when we were the only game in town it was a lot better. But it's not anymore."))

((crossfade to sound: Ham's shop))

Until twelve years ago, Ace was the only pawnshop in Tifton. Now the small town has nine pawnshops -- one for every two thousand residents. Around the corner at Ham's Gun and Pawn, owner Bob Hammond says business is pretty good.

((Hammond: "We make money or we wouldn't be here."))

Hammond says there's no mystery why pawnshops keep opening... including two new ones in Tifton in the past year.

((Hammond: "That's always the way it's been. If anybody starts a bidness and is partly successful in it, then you have a gang of 'em get in it."))

((Caskey: "We've seen a booming growth in pawnshops, check-cashing outlets and rent-to-owns, strong growth in small-loan companies -- a variety of businesses that specialize in serving people with impaired credit records or people with no financial savings."))

John Caskey is an economist at Swarthmore College, and author of 'Fringe Banking,' a book on pawnshops and check-cashing outlets. The number of pawn and check-cashing shops has doubled in just a decade. Caskey says the biggest reason for the growth in fringe banking is the stagnating or declining wages of low-income workers over the past fifteen years.

((Caskey: "That's meant that we've had a larger share of the population that basically lives from paycheck to paycheck with no financial savings and often because of that they have impaired credit records. That is, when you have no financial margin of safety, some little event happens in your life, you can't pay all your bills, your credit record gets impaired, you're no longer eligible to carry a credit card and pass traditional credit screening mechanisms."))

In a survey of households earning less than 25-thousand dollars, Caskey found one in four had no bank account. Some consumer groups say banks have chased away low-income customers by closing branch offices in poor neighborhoods and raising fees. Janice Shields of the U.S. Public Interest Research Group authored a study that found while banks have enjoyed record profits each of the past four years, bank fees increased at twice the rate of inflation.

((Shields: "So what I've identified and the banks keep confirming with their practices is a three-part strategy with respect to bank fees. One, banks are increasing existing fees; two, banks are inventing new fees; and three, banks are making it harder to avoid fees by doing things like increasing the minimum balance to avoid fees."))

But Virginia McGuire, a spokesman for the American Bankers Association, points out banks are still much cheaper than pawnshops and check-cashers. She argues most people without bank accounts could do business with banks if they chose to.

((McGuire: "There is a proportion of the public that simply doesn't want an account. And the banking industry has a challenge to educate the public that there are a wide variety of accounts available and that pricing is often very affordable for low-income people or just people who don't need a full-service account but are looking to just do some basic kinds of things."))

Some consumer groups say banks should be required to provide no-frills accounts that cost little or nothing. Banks have consistently fought such legislation, arguing they're already over-regulated. McGuire says some banks are starting to reach out more actively to low-income customers. At the same time, some big banks and finance companies are investing in fringe banking; American Express is a major backer of the Ace check-cashing chain.

Swarthmore economist Caskey agrees with consumer groups that banks should be required to provide low-cost accounts. He doesn't agree that the fees charged by fringe banks should be reigned in. He says even in states with interest rates of 2- and 3-hundred percent... pawnbrokers are not necessarily overcharging their customers. Caskey points out the average pawn loan is only 70-dollars... but requires as much paperwork as a much larger bank loan.

((Caskey: "It's an expensive business relative to the size of the loan, and that explains these very high interest rates."))

Caskey says the best way to prevent poor people from being hurt by the high cost of fringe banks is to strengthen the Earned Income Tax Credit, putting more money in the pockets of the working poor so they'll feel comfortable dealing with traditional banks. And, he says, schools should provide more consumer education to help people with little financial experience make smart choices.

I'm John Biewen, Minnesota Public Radio News.

High Cost of Poverty Series - Minnesota Pawn - Rent-To-Own - Low-Income Housing