Payday lending operations have grown rapidly in the United States since the early 1990s. At the industry's peak a few years ago, there were more payday lenders in the United States than McDonald's and Burger King stores — combined.
"The payday lender is kind of the emergency banker for the working poor," explains journalist Gary Rivlin. "The idea is that you have some bills that you have to pay today — your check isn't coming for a couple weeks, and you can take a loan out against that upcoming check."
In return, a person agrees to pay interest on the loan — which can be up to "200 percent interest or more on their money," Rivlin says. "It's a bridge loan to cover a gap, but the problem is, the gap keeps getting wider and wider."
Rivlin goes behind the scenes of the payday lending industry in his new book Broke, USA, which examines the $33 billion-a-year "poverty industry." Rivlin, who attended an annual conference of check cashers to learn industry tips, says he decided to write about the industry because of its rapid growth in recent years.
"I was intrigued by how big these companies had become," he says. "It used to be that you could drive a Cadillac and have a nice big home through check-cashing or as a pawnbroker. But now people are making tens of millions, if not hundreds of millions, off of these businesses. I wanted to explore a world that seemed upside down to me — where people with little money in their pockets was good for business."
Gary Rivlin covered Silicon Valley for The New York Times.
Gary Rivlin covered Silicon Valley for The New York Times.
On why payday loan operations exist in poorer neighborhoods
"[Payday loan operations] are there because banks have fled certain neighborhoods — it's working-class neighborhoods, inner-city neighborhoods, some rural neighborhoods. Where can you get your loan? You go to a payday lender, you go to a consumer finance shop [or] you go to a pawnbroker. To me, the real reason payday has grown like it has is more of an economic reason than a geographic reason. There's been stagnating wages among the lowest 40 percent [of wage earners] in this country, and so they're not earning anymore real dollars. At the same time, rent is going up, health care is going up [and] other expenses are going up, and it just becomes harder and harder and harder for these people who are making $20,000 [or] $25,000 [or] $30,000 a year to make ends meet. And the pay lenders are really convenient. Between going home from work and going shopping, you can stop at one of these stores and get instant cash in five minutes."
On how the payday lenders, pawnbrokers and check cashers see themselves
"They tend to cast themselves as noble. You know, 'We're in neighborhoods doing business where others don't go.' It's almost heroic because they're brave enough to be doing business — they cast themselves as providing an essential service for the person who otherwise would be trapped. What do you do if your car breaks down and you owe a few hundred dollars, or you need to pay the auto mechanic a few hundred dollars and you don't have a rich uncle to hit up [or] a credit card? The credit lenders claim that they play an essential role in helping these folks."
On how the payday lenders, pawnbrokers and check cashers see banks
"They were using the banks as a convenient whipping boy. [They were saying] 'consumer advocates were on our case about the check-cashing fees we charge or about charging $15 for every $100 for a payday loan. Meanwhile hundreds of thousands of dollars were being lent in these subprime loans, and it virtually blew up the global economy.' So it was a very handy whipping boy, but the banks have been the best thing happening for the payday lenders and check cashers. They fled these communities, creating the opportunity. But more than that, it's the big banks — the main banks, from Goldman Sachs to Wells Fargo to Wachovia to Bank of America and Citibank — that funded these industries. Whether it's the subprime credit card industry, the payday lenders — they provided the funding and eventually helped bring some of these companies public."
On the profit margins in the payday loan industry
"Until recently, they were making profit margins of 20 percent to 25 percent a year. I used to write about Silicon Valley for The New York Times. You would get noticed in Silicon Valley if you were making profits of 20 percent [or] 25 percent a year — and at the same time growing in double digits year after year. To me, the moral point is: Sure, there's nothing wrong with doing business in the inner city or working-class community in a rusted-out Midwestern town; it's just that you're making so much more profit off the working poor than you are over the more prosperous customer. That, to me, is where we get into morally questionable behavior where there's a profit opportunity."
On rent-for-loan operations
"You need a bedroom set. You want a flat-screen TV. You just can't put it on your credit card the way a lot of people could do it. But you want the item. And so you rent it by the week or the month, and after a certain amount of time, typically 1.5 years, it's then yours, assuming you made every payment along the way. The genius there is [rent-for-loan operators] have figured out how to sell a $500 television set for $1,200. And their customers tend to be happy — they want the TV, there's no other alternative that they can figure out to buy it, so they rent it by the week and if there's a happy ending — if they made all the payments — then they get to keep it."
Broke, USA: From Pawnshops to Poverty, Inc. — How the Working Poor Became Big Business By Gary Rivlin Hardcover, 368 pages HarperBusiness List price: $26
A Greater Share of Wallet
Las Vegas, 2008
The stomping piano chords and tambourine slaps blaring over the loudspeaker are at once familiar. They are the opening notes to the early Motown hit, "Money (That's What I Want)." The nation's check cashers and payday lenders have a dangerously low sense of irony, I mused. We are a respectable business, their leaders have been saying since the founding of the National Check Cashers Association in the late 1980s. Sure, we cater to a hard-pressed, down-market clientele but we are not the money grubbers the popular culture makes us out to be. We provide a useful service critical to the working of the U.S. economy. Our products are heavily regulated and fairly priced. Yet here they were kicking off their 20th annual gathering in October of 2008 with a musical production based on a song whose lyrics repeat, more than thirty times, that what the singer wants, more than love and more than happiness, is lots of money.
The convention was being held in Las Vegas. The women dancing across the stage were young and buxom and dressed in skimpy sequined outfits. The men were buff and tan and similarly underdressed. We could have been sitting in any show room on the Strip except the lyrics had been rewritten for the occasion. Instead of an unconscious self-parody the skit was actually aimed at a handy target in those dark and unsettling days in the fall of 2008: the country's bankers. If not for the behavior or the banks, their industry would not be nearly so robust. The banks abandoned lower income neighborhoods starting thirty years ago, creating the vacuum that the country's check cashers filled. The steep fees the banks charge on a bounced check or overdue credit card fuels a lot of the demand for payday advances and other quick cash loans. The big Wall Street banks had stepped in and provided money critical to the expansion plans of many in the room, but never mind: These entrepreneurs selling their financial services to the country's hard-pressed sub-prime citizenry are nothing if not opportunistic. The nation's narrative, they argued, was theirs. The banks, who were booed lustily throughout the two-day conclave, would serve as the poverty industry's new boogieman.
"I get my money (when I want), I get my money (when I want)," the troupe sang as they danced and pantomimed various financial transactions. Those playing the part of bankers (picture a tie over an otherwise naked male torso) were emphatically shaking their heads "no" ("At the bank I feel like I'm on trial; I'd rather get fast service and a smile"), but when those in the role of customers knock on the door of their local "financial center," they are greeted by friendly people who are only too glad to cash their checks or to loan them cash until their next paycheck. Apparently salvation is sweet. Suddenly a dozen or so very good looking young people are dancing through a blizzard of fake twenty-dollar bills while singing, "I got my money (and it works for me)." The extravaganza brought down the house.
There's no single gathering place that routinely brings together more of the many strands of the poverty business than this one, held this year in a cavernous hall in the bowels of the Mandalay Bay convention center. Those who pioneered the payday advance industry in the mid-1990s started showing up at meetings of the National Check Cashers Association because they didn't know where else to go and, over time, other parts of this subculture of low-income finance — the pawn brokers, Western Union and Moneygram, the country's largest collection agencies — followed. Eventually the check cashers hired an outside consulting firm to give them a new name andince 2000, their organization has been called the Financial Service Centers of America, Inc., a rebranding at once more respectable and opaque. When expressed as an acronym, FiSCA, the name sounds quasi-official, like Fanny Mae, Freddie Mac, or some other agency playing a mysterious but vital role in the U.S. economy.
Business remained good in the poverty industry, despite hard economic times and also because of them. People struggling to get by, after all, is often good news for those catering to the working poor and others at the bottom of the economic pyramid. Everywhere I looked there were people flying their corporate colors. Competing battalions were dressed in look-alike pants and pullover shirts bearing a company logo, each representing another big chain booking hundreds of millions of dollars in revenues each year, if not billions.
Yet despite flush times, the weekend felt like one extended, oversized group therapy session for an industry suffering from an esteem deficit disorder. The CEO of one of the industry's biggest chains, ACE Cash Express, even brought a video created for the occasion aimed at bucking everyone's spirits. A montage of warm black-and-white photographs flashed on a screen hovering above the stage as an ethereal cover of the song, "Somewhere Over the Rainbow" played and a narrator intoned, "They need to pay their rent. They need to feed their family. They need someone who understands them." Joseph Coleman, the group's chairman, had offered similar self-affirmations in his welcoming remarks. Virtually every person in the room made his or her living catering to subprime customers with tarnished credit. So Coleman opened by assuring them that they were not to blame for the financial hurricane that was leaving the global economy in tatters. Feel proud of what you do, Joseph Coleman told an audience of around 800 people. "While consumer advocates were organizing against us for charging $15 on a two-week loan," Coleman said, and while well-meaning community activists and pinhead bureaucrats were wringing their hands over those choosing to pay a fee to a check casher rather than establishing a checking account, "the big boys were selling toxic six-figure mortgages that threatened to bring down the worldwide financial system."
"No one matches the service we give our customers," Coleman, who runs a small chain of check cashing stores in the Bronx, reassured his cohorts. "No bank matches our hours. Our products fit our customers' lifestyle." Look at any member of the easy-credit landscape, whether the used auto dealer offering financing to those who could not otherwise secure a loan or those who saw the fat profits that could be made pitching faster IRS refunds to the working poor. We're ubiquitous in the very neighborhoods where businesses tend to be scarce, Coleman said. We're willing to serve these people who otherwise would do without. And yet — here a picture of Rodney Dangerfield appeared on the giant overhead screen — "we don't get no respect." With that the room erupted in appreciative applause.
From Broke USA by Gary Rivlin. Copyright 2010 by Gary Rivlin. Excerpted by permission of HarperCollins. All rights reserved.