Sunday, June 25, 2017

A Patron’s Eye View

Why do people with credit cards use payday lenders?

Why do people with checking accounts use check-cashing stores?

I just finished “The Unbanking of America,” by Lisa Servon, which answers those questions in a disarmingly simple way.  Servon, a professor at UPenn, got jobs working at a payday lender and a check cashing store, and she asked around.  She talked to her bosses, coworkers, and customers.  By treating her various sources as intelligent people responding rationally to their circumstances, rather than as helpless victims of evil predators, she was able to stitch together a pretty good argument for why people make the choices they make.  

In its approach, it reminded me a little of Tressie McMillan Cottom’s “Lower Ed” or Matthew Desmond’s “Evicted.”  In their different ways, each book addresses a policy question that is usually framed in terms of smart, crafty, evil people taking advantage of clueless, ignorant, poor people, and blows up the assumption.  In no case are predators let off the hook, but the “prey” are actually (mostly) capable and intelligent people doing the best they can.  Understanding why this is the best they can do, and what would give them better options, leads to a very different set of prescriptions.

Servon’s argument has that quality that many good ideas have of being obvious the minute after you hear it.  What’s the appeal of a check cashing store?  Servon answers:

Picture the interior of your bank.  Now imagine for a moment that you are a new immigrant.  Is information prominently posted to tell you what products are on offer and how much they cost?  Now imagine the interior of a check casher - or visit one. It resembles a fast-food restaurant more than a bank.  Posters tell you what products are sold, and large signs above the teller windows list every product, along with its price… (19)

The check cashing store, unlike the bank, earns patrons’ trust through transparency.  Servon’s book is full of people who have lost patience with a bank after a ten dollar overdraft led to a thirty dollar fee and another overdraft, which led to another fee, and so on.  Compared to that, a flat fee of $1.50 to pay a bill is a bargain.

The check cashers and payday lenders also make a point of customer service.  Servon notes that in her time at the check casher, about 80 percent of the customers spoke Spanish; her own ability to speak Spanish was key in doing the job.  And the tellers at the check casher and payday lender are given a certain amount of autonomy to grant fee waivers and extensions for steady customers.  

In other words, the low-end financial service providers may be expensive, but they’re clear.  The higher-end ones are sneakier.  “Free” checking that always pays the largest bill first in order to maximize overdraft fees is a long way from free.  Folks who’ve been burned a few times know that.

The check cashers also offer instant money.  If you’ve been lucky enough to have had direct deposit for a while, this may fly below your radar, but for folks living on the ragged edge of disaster, a several-day float for a check is a disaster waiting to happen.  If you get paid on Friday but the check won’t clear until Wednesday, and your kids are hungry now, the check-casher’s fee suddenly seems like a pretty good deal.  Yes, it’s expensive in an objective sense, but you will get the money when you need it.  If waiting until Wednesday to pay a bill means incurring a late fee, the late fee will almost certainly be more than the check-casher’s fee. Servon gives the example of a coworker who took out a payday loan to cover an emergency car repair.  She knew it was an expensive way to get money, but without a working car, she’d lose her job.  Given those (admittedly bad) options, the payday loan was the least-bad available choice.

Why do people with credit cards use payday loans?  Payday loans don’t show up on credit scores.  They’re protecting the credit card for deep emergencies, and using the payday loans for everyday emergencies.  And given the number of employers who check credit scores when hiring -- using it as a proxy for general responsibility -- protecting the credit score makes sense.  Keeping your debt below the radar actually improves the chances of getting a job that will allow you to pay it off.

I’m only scratching the surface of a remarkable book; it’s well worth reading slowly.  The distance between the logic of Servon’s interlocutors and the logic of most policy talk is striking.  I’ve read and heard quite a bit about cracking down on payday lenders, but they meet a real need.  Cracking down on them without changing anything else would put the woman who needed a car repair right away in an even worse spot than she’s already in.  If we want to starve this sector out, we need to do it by taking away its reason to exist.  Servon offers several worthwhile suggestions, ranging from vastly simplified disclosures -- along the lines of the fast food style menu -- at banks, to vastly shortened “float” periods, to serious attention to decent wages.  Some are more likely than others,but they all come from the valid assumption that poverty can be both expensive and self-reinforcing.  Breaking those cycles requires conscious, deliberate effort.

As with McMillan Cottom’s and Desmond’s books, Servon sheds light through legwork.  She gives us a patron’s eye view of a sector that’s usually either ignored or blindly vilified.  It’s the kind of information without which we’ll keep making decisions -- with all of the best intentions -- that make hard lives that much harder.  Check it out.