As part of a series on poverty, MPR’s John Biewen looks at the growth of so-called 'fringe banks'…pawnbrokers and check-cashing shops. A growing number of low-income Americans are relying on 'fringe banks' in place of traditional banking services.
Advocates for the poor say one reason for the persistence of poverty is that low-income people often pay more for basic goods and services than middle-class people do, making poor people feel they're running in place. Reporter John Biewen travelled to Georgia, where people who get loans from pawnshops pay an annual interest rate of 300%.
This is part one of four-part series "The High Cost of Poverty"
Click links below for other parts of series:
part 2: https://archive.mpr.org/stories/1997/01/13/the-high-cost-of-poverty-minnesota-pawn-part-2
part 3: https://archive.mpr.org/stories/1997/01/14/the-high-cost-of-poverty-rent-to-owncosts-a-lot-part-3
part 4: https://archive.mpr.org/stories/1997/01/15/the-high-cost-of-poverty-low-income-housing-part-4
Awarded:
1997 SPJ Sigma Delta Chi Awards for excellence in journalism Award, Public Service in Radio Journalism category
1998 PRNDI Award of Journalistic Excellence, second place in Division A - Enterprise/Investigative category
Transcripts
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JOHN BIEWEN: Tifton is a town of about 17,000 in south Georgia's cotton country. It's the seat of Tift County, where in the last census, 23% 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.
CELESTE SNEED: I made $5 an hour. I paid my rent. One week, I paid my rent. One week, I paid my light bill, and I got two children. My daughter chose to live with her father. That because he had so much money. Mother didn't have nothing.
JOHN BIEWEN: 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 $30 two months ago. Many northern states limit Pawnshop interest rates to 3% a month, or 36% a year.
In the South, laws are much more lenient. Georgia allows the highest pawnshop interest rates, 25% a month, or an annual equivalent of 300%, although the rate drops in half after three months. Celeste Sneed pays interest of $7.50 a month on her $30 loan, compared with the $0.50 a month she'd pay if she owed $30 on a 20% credit card. When asked about the interest she's paying on her pawned television, Sneed can't quote a figure.
CELESTE SNEED: It's not no high rate. I mean, I live with it, deal with it. All my friends, I got told you, if you got anything, don't come a time when you're going to fall. You got anything. Ace is the place to be.
[CREAKING DOOR, STORE AMBIENCE]
BECKY JORDAN: OK, come here, Miss Celeste.
CELESTE SNEED: 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 Acepawn, Becky Jordan, for extra time.
CELESTE SNEED: I didn't come to play but one time.
BECKY JORDAN: Right
CELESTE SNEED: But anyway--
BECKY JORDAN: When are you going to come pay.
CELESTE SNEED: Let me come in Friday. I'll tell you about it because I don't--
JOHN BIEWEN: Becky Jordan and her husband have owned Acepawn for 25 years. Despite her shop's high-interest rates, Jordan claims she makes less money than she once earned as a school teacher.
BECKY 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.
JOHN BIEWEN: Until 12 years ago, Ace was the only pawnshop in Tifton. Now the small town has nine pawnshops, one for every 2,000 residents. Around the corner at Ham's Gun and Pawn, Owner Bob Hammond says, business is pretty good.
BOB HAMMOND: We make money or we wouldn't be here.
JOHN BIEWEN: Hammond says there's no mystery why pawnshops keep opening, including two new ones in Tifton in the past year.
BOB HAMMOND: That's always the way it's been. If anybody starts a business and is partly successful in it, then you have a gang of them get in it.
JOHN CASKEY: We've seen a booming growth in pawn shops, check-cashing outlets, and rent to owns, a variety of businesses that specialize in serving people with impaired credit records or people with no financial savings.
JOHN BIEWEN: John Caskey is an economist at Swarthmore College and author of Fringe Banking, a book on pawn shops 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 15 years.
JOHN 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.
JOHN BIEWEN: In a survey of households earning less than $25,000, 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 US 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.
JANICE 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 more difficult to avoid fees by doing things like increasing the minimum balance to avoid fees.
JOHN BIEWEN: 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.
VIRGINIA 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 the pricing is often very affordable for lower income people, or just people who don't need a full service account and are just looking for something fairly inexpensive to do some basic kinds of things.
JOHN BIEWEN: 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 overregulated. 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 reined in. He says even in states with interest rates of 200% and 300%, pawnbrokers are not necessarily overcharging their customers. Caskey points out the average pawn loan is only $70, but requires as much paperwork as a much larger bank loan.
JOHN CASKEY: It's an expensive business relative to the size of the loan, and that explains these very high interest rates.
JOHN BIEWEN: 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.