Maybe those payday loan providers just want to help?
Take a look at this New York Times Magazine article: Check Cashers, Redeemed
Twenty or thirty years ago, traditional financial institutions fled neighborhoods like Watts, and guys like Tom Nix, co-founder of the biggest chain of check cashers and payday lenders in Southern California, rushed into the vacuum. They built a whole new financial subculture, which now includes regional giants like Nix, national brands like Ace Cash Express, Advance America and Check ’n Go and thousands of local chains and anonymous corner stores — more outlets, in total, than all the McDonald’s restaurants in the United States plus all the Starbucks coffee shops. Inside, it’s like banking turned upside down. Poor customers are commodities, deposits are irrelevant, bad credit makes for a good loan candidate and recessions can be boom times. Add up all those small transactions and throw in businesses like pawnshops and auto-title lenders, and you’ve got a big industry — $100 billion annually and growing. Nix alone pulled in $28 million in fees last year.
There are two big problems with businesses like Nix Check Cashing. One is that the fees are high. Most cashers pocket between 2 and 4 percent of each check’s value, which a recent Brookings Institution study calculated could add up to $40,000 in fees over a customer’s working life. And their version of credit, a two- or four-week cash advance against a postdated check, known as a payday loan, is even pricier — about 30 times the annualized interest rate of a typical credit card.
The second problem is that cashing your paycheck, instead of depositing it, encourages you to spend all your money rather than saving whatever is left over at the end of the month.
It's fascinating how many people distrust banks so much that they turn to check cashing outlets that charge exhorbitant fees. But I can't blame them-- I remember what it was like to have a low enough cushion of savings that I'd get hit with bank fees for dipping below a minimum balance, and it still pisses me off how much banks charge for international ATM transactions even though I now have enough money that I haven't had to worry about other fees for years. Banks have an amazing way of acting like they're doing you a favor by taking your money. And the less money you have, the more banks screw you.
This article does a great job illustrating how check cashers have gained their customers' trust, and it's somewhat encouraging that some, like the Nix company mentioned above, are now trying to offer a broader range of financial services and encourage savings. Of course you have to take that with a grain of salt:
Not everyone is ready to trust Nix’s motives just yet, or to embrace him as a champion of the poor, especially consumer advocates who have spent years lobbying to cap check-cashing and payday-loan rates and remember when Nix charged even more than he does today. “It behooves predatory companies like Nix to be seen positively by their communities,” says Roberto Barragan, president of the Valley Economic Development Center and a critic of Nix from way back. “But at the end of the day, it’s not about the financial well-being of his customers.”
For now, most banks remain reluctant to fight with check cashers and payday lenders for low-income customers; they don’t believe there’s enough in it for them. Just a few years ago, though, wire-transfer companies like Western Union were the only option for immigrants who wanted to send money abroad. Banks thought it was a sketchy business. The transfer companies charged about the same as a payday loan, $15 to send $100 to Latin America. But then a few banks decided to compete with them, even accepting foreign ID cards. And then banks started to compete with one another. And pretty soon, just about every bank wired money overseas. Businesses like Western Union had to slash their fees by nearly two-thirds.
“These communities spend about $11 billion a year on ghettoized financial services, about the same as what Wall Street spends on mergers-and-acquisitions fees,” says John Hope Bryant, founder of the nonprofit Operation Hope. “We’re not talking about small change. But there’s no competition for these dollars.” That’s the idea behind plans like Bank on California: to convince banks that marketing themselves to poor customers isn’t just a charitable act; it’s a benefit to the bottom line.
Nix says he hopes his model will do the same thing. “We’re going to be a tough competitor,” he told me. “We’re going to get a lot of business, and that’s going to force the rest of the industry to take a look at their prices, to be able to compete.” It’s not how you expect a banker to the poor to talk. But he might be onto something.