Thursday, November 20, 2008

Nix Agonistes

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.


Anonymous said...

I don't think the people who go to check cashing places distrust banks, they either can't get a bank account because of poor credit, or they can't do the math to keep their balance in the black, and get charged tons of fees, and the accounts end up going to collections. If you get paid 200 dollars, and have to pay 30 bucks off the top to get it cashed, the remaining 170 is yours free and clear. No hold time on your check, all cash, no problems.

Anonymous said...

That would be some serious distrust in banks! But I wouldn't be surprised if someone made the emotional decision to cash the check and lose a portion, as opposed to depositing the whole thing and losing the whole thing. There could also be timing issues; some banks won't release a deposit for a few days. And if you gotta eat now, that's not going to be good enough!

Anonymous said...

In many low income neighborhoods, there are no banks. And if there is a bank, it's open the usual bank hours, i.e., when people are at work. It is not always easy to find a bank to use, but there is always a check casher.

Kris said...

It's my understanding that if you have a certain amount saved, whether it's in checking or saving, you're not eligible for government assistance. For a single working parent, that's a huge blow. So the check cashing is understandable.

Anonymous said...

We are all adults here, right?

"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."

What paternalistic bull****.

Anonymous said...

Hey Madame X -
As one of your banker buddies, the last bank I was at serviced a lot of check cashers as their business customers. You are correct - many of the check cashers customers distrust banks, frequently because of the immigration aspect. And, most banks tend to be strict on wiring money, requiring strict know your customer policies. But, there is also a group of people who are just what banks consider financially illiterate; those who just dont realize you can usually get a free checking account with no min balance requirement and want to operate in cash only. Many banks have done educational efforts towards those folks, but with the current crisis, banks are not concerned with the low income, but with saving themselves.

Anonymous said...

I spent a good deal of my high school and college years waiting tables, and many of the people I worked with didn't have bank accounts. I agree with Tasha, that often it is because someone has bad credit and has trouble getting a no-fee checking account. However, most of them didn't use payday loan shops to cash checks, because local grocery stores would often cash checks for $3 to $5. And of course bank overdraft fees will never be a problem if you don't have a checking account! For those who have trouble budgeting, seeing how much cash you have left is much easier than keeping track of numbers in a checkbook. Isn't that why so many people encourage others to use the envelope system for budgeting? And for those who are low-income, there often isn't enough left over to think about putting money in savings, anyway.

Just Plain Scared said...

When I first started working, I used a check cashing place for a while, mainly because my income wasn't steady, and I didn't want to pay all those bank fees once the balance dipped below a certain level.

Also, there's nothing like knowing where your money is at all times. These days, I do my banking at Wells Fargo, a very stable, well-capitalized bank. But I've still been taking out cash and hiding it.

After all, these days, whom can you trust?

@Asset Gatherer--
You made some good points. When you have little money to begin with, waiting for banks' processing procedures can be pretty scary, especially when the electric bill is due.