1. Howard Karger Peter A. Kindle University of Houston
The High Cost of Poverty: Credit and Financial Services in the Fringe Economy
Howard Karger
Peter A. Kindle
University of Houston

2. Mainstream Economy
Assets
Consumption
Income
Credit

3. Fringe Economy
Assets
Consumption
Income
Alternate Financial
Services

4. Fringe Economy Characteristics Comprehensive Mature Fully-formed
Parallel (hidden)
Replaces access to credit
Participants
12 million households without a bank relationship
31 million households with low income
18 million households that are fully leveraged

5. Let’s get Specific Pawnshops Check cashers Rent-to-own stores
Payday lenders
Used auto industry
Sub-prime mortgages
Overdraft protection
Tax preparers and tax refund loans
Secured and stored value credit cards
Prepaid telecom services
“Getting out of debt” industry

6. Magnitude of the Problem
MacDonalds 13,500
Burger King 7,620
Target 1, Check cashers
Sears 1, Payday lenders
JC Penney 1,000
Wal-Mart 3, ____________
28, < 33,000

7. Magnitude of the Problem
Check cashers process 180 million checks worth $55 billion in 2002.
Rent-to-own stores had 2.7 million customers in 8,350 stores that generated $6.2 billion in sales in 2004.
In 2001 pawnshops, check cashers, rent-to-own stores, and payday lenders processed 280 million transactions generating $78 billion in revenue – over 62% of total federal spending on social welfare.

8. Mainstream Economy Assets Investment Consumption Income Credit
Credit History

9. Fringe Economy Assets Consumption Income Alternate Financial Services
Fees and Interest

10. The Fringe Economy Difference
Low or no concern with customer’s prior credit history.
The credit decision is asset-based.
Credit worthiness is replaced by over-securitization.
Fees and interest are structured for appearance of ease and convenience – often annualized in triple digits.

11. Selling the Payment Behavioral economics Used auto industry
People do business with people they like.
Rational economic “man” is a myth.
Used auto industry
Rent-to-own stores
Highly inflated prices and triple digit interest are irrelevant – sell the weekly, bi-weekly, or semi-monthly payment.

12. Triple Digit Interest Check cashers - 1% fee is > 365%
Tax refund loans – fees + interest > 417%
$4.6 billion of $30 billion refunded in EITC and CTC went to fees in 2002
Secured and stored value credit cards –
Fees vary but usually > 20% of value
Interest rate on your own money > 24%
Overdraft protection - $10 fee > 278%

13. Pawnshops Scope – 5 publicly traded corporations
3 biggest had $1 billion in revenues (2003)
Locations doubled to 14,000 from
Security – 33% to 50% of resale value
Average loan $75; claim 30% default rate
Rate of return – fees + storage + interest
Estimated at 120% - 300%

14. Payday Loans Scope – 7.6 million customers
Locations from a few hundred to 25,000
Revenues of $25 billion in 2003
Security – criminal prosecution
Aggressive collection and punitive fees
Claim losses of 4% to 8%
Rate of return – 400% to 800%
Twice as profitable as pawnshops

15. The Fringe Economy is Extractive (New Colonialism)
Loans designed as prepaid rents
No asset accumulation services
Equity stripping
Predatory (Federal Reserve)
Asset-based
Loan flipping
Fraud or deception
State regulated
Necessary?
Any financial transaction that inflates consumer costs without increasing creditor risk is predatory.

16. Inconsistencies
High risk should be related to potentially high rates of return (basic business), but in the Fringe Economy:
Risk is eliminated through over-securitization
Threat of losing “borrowing” privileges
Lack of access to consumption
Some Fringe Economy sectors seem to prefer default

17. Recommendations Substance over form Upward referral
Mandatory credit reporting
Community Reinvestment Act
Federal regulation is needed
Financial literacy training
Rate justification by loss ratios