"Fringe banking" is a relatively new term that was coined to describe the practices that some less than respectable financial institutions currently engage in.
In the old days, the practice was known as loan sharking and was generally frowned upon. In today’s world, companies that engage in the practice of “fringe banking” are free to advertise their services over the airwaves and in newspapers. Naturally, the “services” that these so-called friendly neighborhood institutions offer are aimed towards the poor and/or those down on their luck. You might call them lenders of a last resort…
Quick, what image comes to your mind when you picture one? For me, it’s that of a place that’s dirty in nature and where so-called “hot” goods have been swapped for a minimal amount of cash and later re-sold at a huge profit by the pawnbroker. (Okay, so I watch too many cop shows). Frequented by drug dealers, drug addicts, petty criminals and the like, your friendly neighborhood pawn shop has been around forever.
Or has it?
Over the last 15 or 20 years, the number of pawn shops in the United States has tripled to over 15, 000. Business is booming. Estimates are that they make about 4 million “loans” a year and account for over 3 billion dollars in business.
Here’s how it works.
You need cash and you need it quick. You’ve already maxed out your credit cards and tried to tap a few friends. No luck, they’re just as broke as you. You figure, fine I’ll just go to a bank but the only trouble is, the bank has no interest whatsoever in lending “small” sums of money. It’s just not worth their while to fill out all that paperwork and run a credit check on you in order to cough up something like $200.00. What do you do?
Well, your stereo cost you, let’s say, $700.00 when you bought it only a year ago. You pack it up and drag it down to your friendly neighborhood pawnbroker who gives it a quick appraisal. He offers to lend you $100 or $150 (whatever) and takes possession of the stereo. You sign a contract stating that you’ll either repay the pawnbroker within a specified time (usually 1 to 3 months, no partial payments) or he/she is free to do whatever they wish with your stereo. Naturally, they’re not gonna throw it in the trash after 3 months, they’re gonna sell it. They can usually get somewhere between $400 - $500 when they do and they pocket the difference. Not a bad profit margin…
Check Cashing Services
Ah, the home of the payday” loan . The place where it costs you anywhere from 2 – 4 percent of your hard earned money should you need to cash a check there. Where do I begin?
Again, let’s assume that you’re short on cash and you find yourself in the circumstances that I’ve described above. The only difference this time is that you have a job, you’ve been there for a little while, you have a checking account and you have a phone. You’ve seen those ads on television that tell you can now qualify for a “payday loan” (or advance). Sounds too good to be true, doesn’t it?
Let’s say you wanted to get yourself an advance of $100.00 until your next payday. All you have to do is bring your pay stub and a copy of your phone bill with you and possibly, a bank statement. You are told to post date your check for the date you want it sent to the bank – anywhere between 1 an 15 days. You are told to write your check for $115.00 and receive a $100.00 back in return.
If you let the loan run its course and the check cashing joint deposits your check, you my friend have been charged about 1.00 a day in interest or upwards of 350 percent a year!
So who frequents these places, the rich, since they can afford rates like that? No folks, it’s usually the poor or middle class folks who are being taken to the cleaners in deals such as these.
For the record, these check cashing places cash over 60 billion dollars a year in checks. They number over 7,000 and are growing every year.
There are some other predatory lenders out there such as “rent to own” shops that wind up costing individuals 3 to 4 times the retail value of an item, and “title loans” where you can offer up the title of your vehicle in return for a minimal amount of cash. I find them all despicable since they target those that have no other recourse but to take “advantage” of the services they offer since the banks won’t touch them.
I’ve got a theory on that. The deregulation in the banking industry during the 1980’s is largely to blame. Gone are most of the S & L’s as well as neighborhood banks. Don’t believe me? Try finding one in a low-income neighborhood. If you’re lucky enough to find one there, try finding one that doesn’t require that you maintain a minimum daily balance if you want to keep an account. Try finding one whose fees aren’t structured in favor of large depositors or borrowers who have the (maybe?) capacity to repay. Try cashing a check if you don’t have an account there. I bet it’ll be pretty easy to find one of the check cashing services though.
So who does regulate these types of places? Nobody at the federal level and I think only 28 states have some kind of rule in place about the interest rate that can be charged on these payday loans. The Mafia would be proud.
Anybody else remember a few years back when EFT was all the rage? The government estimated that it would save millions by lowering the cost of cutting and processing all types of checks from social security to payroll. Well guess what? Estimates are that almost 9 to 10 percent of Americans don’t maintain an account with a bank or similar financial institution so therefore the checks are still mailed out. And guess where a lot of them get cashed? You got it, at one of the “fringe banks”.
One last thing, who do you think finances operations such as “payday loans” and “rent to own” joints? Many of these kinds of places have also cut sweetheart deals with more traditional financial institutions that involve banking services and favorable interest rates. All of this occurs at the expense of the people whom the bank turned away in the first place. Somehow, it just ain’t right.