Michael Hudson
Michael Hudson

Fellowship Title:

The Costly “Banks” That Welcome The Poor

Michael Hudson
May 11, 1993

Fellowship Year

Ask Jack Daugherty how many pawn shops he owns in the United States, and he has to put down the phone for a minute to check. “It’s kinda a moving target,” he apologizes. “I have to ask somebody every week.”

The correct answer: 225.

For now, at least.

A decade ago Daugherty owned just one, in Irving, Texas. But in 1983, after years as an absentee owner dabbling in night clubs and dry oil wells, Daugherty had an idea.

His pawn shop was surpassing more established competitors. He thought the reason was a simple ethic of customer service: Give ’em self-esteem. Make sure things look nice and the employees are friendly and fair, so people won’t have to feel like they have to slink into a pawn shop.

Daugherty turned that idea into an empire of Cash America pawn shops that stretches across the Southeast and into Ohio and Colorado-and has designs on every state in the union.

Cash America is one of a new breed of businesses that has sprung up on urban street corners and in suburban strip malls across the nation.

Pawn shops and check-cashing outlets-their cousins in the down scale financial market-are shedding their images as shady, inner-city operators. Since 1987, the number of check cashers has jumped from slightly more than 2,000 to an estimated 5,000. In the past decade the number of pawn shops has doubled to an estimated 10,000.

Cash America, Almost-A-Bank, Mister Money and a host of other chain operations have found there’s good money to be made in serving low-income and working-class people.They’ve worked hard to polish their images in their search for the “non-bank public.” Some have attained the ultimate in corporate respectability by gaining spots on the New York Stock Exchange and other securities blocks.

But consumer activists see something else lurking behind the expansion and the new, scrubbed images: old fashioned exploitation and price-gouging.

“I view these places as parasites,” said Frank Trinity, a staff attorney with the Legal Clinic for the Homeless in Washington, D.C.

Check-cashing outlets used by Trinity’s clients generally charge fees of 2 percent to 10 percent to cash a check.

Finance charges for pawn-shop loans in some states can run as high as 20 percent a month-or 240 percent a year.

John Caskey, a Swarthmore College economist, estimates that a bank-less family earning $16,500 spends nearly $300 a year on check cashing and money orders to pay bills. “They don’t really think about how fast $5 a week over a year adds up to a big chunk of their income,” Caskey said.

If it had a checking account, the same family probably would spend less than

$100 a year on minimum-balance penalties and other fees,

Caskey, who has devoted the last few years to studying pawn shops and check cashers, has coined a name for them: “fringe banks.”

Caskey sees three major reasons for their rise: the overall growth in the number of poor and near-poor in the U.S., the increase in mainstream banks’ fees for checking and other services, and banks continued reluctance to maintain branches in low-income neighborhoods.

The portion of America families without a bank account has increased from 9 percent to 14 percent in the past 15 years, according to the Federal Reserve.

Before this spring’s riots in South Central Los Angeles, its 585,000 residents were served by at least 133 check-cashing outlets-but just 19 bank and savings and loan branches.

Fringe banking is one example of how the economics of poverty-especially in inner cities like South Central L.A.makes poor people poorer. Because they have little money and live in low-income neighborhoods, they pay extra for just about everything.

Pacquin Davis, a young mother who lives in an Atlanta public housing complex, has struggled with this reality for years. Last year, she often cashed her welfare check at the Shopper’s Market around the comer from her apartment. There, the grocer charged ~3 to cash a $390 check.

When she needed a little extra money, she went to Fulton Loan Co., a downtown Atlanta pawn shop. In exchange for a $75 loan, she paid $15 a month in interest.

Charging the same amount on a credit card would have cost her little more than a $1 a month in interest.

Last summer, determined to break away from fringe banks, she went shopping for a bank account.

The first two banks she visited, First American and Georgia Federal, turned her away because she had a bad mark on her credit history from a furniture store purchase five years ago. She said Georgia Federal refused to even allow her to open a savings account.

Her Legal Aid attorney, Dennis Goldstein, said at least a dozen of his clients have been turned down for savings accounts at Atlanta banks because of bad credit. That makes absolutely no sense, he said, because there is no chance of bounced checks with savings.

For Davis, just 25, getting turned down by the banks was horrible–the kind of first-time experience that often turns people off banks for good. “They just put that fear in your heart,” she said. “It kinda scares you to walk in that door.”

Finally, with encouragement from Goldstein, she tried again. She walked into Trust Company Bank and asked for a checking account. She got it. She must pay $3 each month she falls below a $500 balance, but it’s worth it to have a place to put her money.

“As long as I know it’s in the bank, I don’t too much worry about it,” she said. “I don’t too much want to go and get it and spend it. So if the kids say,’Momma, we need some shoes for a school program,’I can go down to the bank and get the money.”

Not everyone feels as strongly about being part of the mainstream banking system.

One drizzly Wednesday, Carl Edwards stopped by the Anykind Check Cashing Center at 12th and H streets in Northeast Washington, D.C. He slipped a $500 worker’s compensation check through the slot in the bulletproof glass that separates teller and customer. The teller deducted Anykind’s $15 cut-a 3 percent fee-and gave the balance to Edwards.

“It’s kinda high,” Edwards, 43, said. The first time he went to Anykind, he said, it cost him more than $60 to become a member and cash his check. But he’s been coming back for two years. He’s tried banks before, but “you gotta have an account and all that.”

Check cashers and pawn brokers aim to be one-stop financial centers for the bank-less. They sell money orders, subway tokens and lottery tickets, make wire transfers, take payments for utility bills, distribute food stamps and make “fast tax loans” to customers who can’t wait for their IRS refunds.

The profits are generous. In 1991, Daugherty’s Cash America reported just tinder $ t I million in profits on $138 million in revenues. John Binder, a University of Illinios-Chicago economist, studied Illinois check cashers and found they earn 10 to 20 times higher return on equity than banks.

Industry officials say that’s not a fair comparison, because high security and insurance costs prevent them from making exorbitant profits. Pawn brokers and check cashers bristle at suggestions they’re exploiting the poor. If customers were being mistreated, fringe bankers say, they’d vote with their feet by going elsewhere.

Daugherty concedes that people who use pawn shops and check cashers pay more than bank customers.

“There’s a reason for that: Anything you buy in quantity you pay a lower price for, whether it’s land or potatoes.”

Because a typical pawn loan only involves $60 or $70, he said, its relative paper-work cost is much higher than it is with the larger loans that banks make. And “it’s really a kinder transaction” than a bank loan, because a pawn shop will never ruin your credit rating.

Daugherty defies anyone to find a customer who’s unhappy with Cash America. Just to make sure, he sometimes drives to his stores unannounced, stops his car and quizzes customers as they come into the parking lot.

One thing Cash America has not tried to do, however, is undercut the competition in price. Its average interest rate is the equivalent of 205 percent a year, according to Institutional Investor, a financial newsletter.

Daugherty’s stores usually charge the maximum finance fees allowed by state law. “The reason for that,” he said, “is we don’t want to alienate the industry.”

Industry solidarity is important: Pawn brokers work together to lobby to keep most states’ interest rate ceilings high. At least half the states allow pawn shops to charge the equivalent of annual interest rates of 120 percent or more a year.

To build goodwill with the public, his company and other fringe banks have poured money into advertising, public relations and charity drives. In Texas, ACE Cash Express, the nation’s largest check-cashing chain, has offered free money orders to parent- making child-support payments.

The other path to respect has been through the stock market. The value of Cash America’s shares have more [Iran tripled since it went public in 1987. Four other pawn chains are also publicly traded.

This has not escaped the attention of corporate America, which has lost its long-held distaste for doing business with fringe banks. Western Union has forged a partnership with California’s Nix check-cashing chain. NationsBank is helping to fuel the growth at First Cash – a Texas-based pawn chain started by two ex-bankers through a $3.5 million line of credit.

Stephen Wolf, treasurer of New York’s Pay-O-Matic check-cashing chain, said check cashers may someday link more closely with traditional banks by offering space for automatic-teller machines or even by taking deposits for banks that don’t have branches in poor neighborhoods. That would allow banks “to be involved in these communities without necessarily having all the bricks and mortar.”

But even as leaders like Cash America have improved the public’s perception of fringe banking, some practices in the industry may rekindle older, more tawdry images.

Across the South, pawn brokers have been hit with lawsuits over an increasingly widespread practice: car title pawns. Customers sign over their car titles and then drive away with their car and a loan. If they can’t repay the loan and interest, however, the pawn broker gets the car.

Florida consumer officials have sued auto-pawn brokers throughout the state, accusing them of deceit and usury for making loans with annual interest rates reaching 1,000 percent. At least 20 have been forced out of business.

In Florida, Texas, Kansas, and Virginia, authorities have accused some check cashers of loan-sharking.

Virginia’s attorney general sued three check-cashing companies, claiming they charge outrageous fees to advance money against post-dated checks. In a typical loan described in the lawsuits, a customer writes a check for $260. The check casher gives the customer $200 and agrees to hold the check until the customer’s next payday. The interest bite on these short loans can equal annual rates of more than 2,000 percent.

Check cashers are unregulated in 42 states. Three years ago, the Virginia Citizens Consumer Council tried but failed to get the state to limit check cashers’ fees.

Jean Ann Fox, the council’s president, said the industry’s trade association won out by telling state, officials: “Trust us. We can regulate ourselves.” She said the loan-sharking allegations are “an indication that it’s not working.”

Despite such occasional public relations problems, there’s little doubt fringe banking will keep growing.

Cash America’s Daugherty believes the “non-bank” market includes 60 million Americans. So far, he says, pawn brokers and check cashers have tapped only 10 million to 15 million people. That leaves plenty of elbow room for expansion across the U.S..

But he won’t stop there. Cash America already owns 26 profitable pawn shops in Great Britain, and Daugherty believes other places are ripe too. “We’re looking at Europe, Canada, Australia, New Zealand, Russia, South Africa,” he said. “It’s the world. Worldwide.”

©1993 Michael Hudson

Michael Hudson, a staff writer with the Roanoke (VA) Times & World-News, is investigating the, problems of low income consumers.