By the standard definition, payday cash advance and related non-bank financial services are not very popular products. Three to five per cent of American consumers view non-bank financial services or lending as check cashing.
According to Americans for Financial Reform, that thought make those financial products unpopular among the average Americans. As per a recent data from Pew Charitable Trust, seventy per cent of Americans want to see non-banked consumer services and payday lending reformed and eighty per cent believe that they are very expensive.
So, most people hate payday lending and view check cashing as inherently predatory and suspicious.
However, there is one notable minority of American consumers who rather like these products – the ones who uses them. For this group of approximately ten to twenty million Americans, payday is quite popular.
Lisa Servon, Professor of City Planning at the University of Pennsylvania and former dean at The New School, noted that something did not make sense because if payday lending was so toxic and awful, then the number of people using these products would not be rapidly increasing.
Servon told PBS News Hour that she has spent twenty years working in low-income neighborhoods and she knew that people who do not have very much money are well aware of where every penny goes. That is when she thought that there has to be more to the story about the payday lending industry.
In her book, The Unbanking of America, she tried to tell a story – a story that she researched by working in various parts of the non-bank financial services industry including check cashing and payday lender shop. She said that the reasons are neither hard to understand or illogical.
Consumers like payday lenders since they offer consistent transparency and consistent access to those who are living very close to the financial margin.
Accessibility and Access
When it comes to funds, consumers with savings do not think about immediacy as a driving concern. A check that goes to the bank and is not available for a few days does not seem like a life-and-death situation because the consumer presumably has funds in the account. However, that is not the financial reality for those consumers who use payday loan and check cashing services. Servon observed that this can be the cause why these financial products may seem odd to those outside of the unbanked experience.
Also, ATMs do not give $8 or $13. They give multiples of $20. Since the underbanked consumers need every dollar that they can get access to, everything suddenly makes so much more sense.
She further noted that these consumers require more than just funds in their hand. They also require funds to be distributed. The check cashers often act as a one-stop shop for multiple financial services, such as remittances to relatives overseas, pre-paid cards, paying rent or paying bills. Also, these services are available 24/7 as opposed to the 9 to 5 bankers hours.
Moreover, the payday lenders are fulfilling the basic needs of customers that are non-optional. Consumers pay their bills with payday loans, they do not purchase luxury items.
Servon said that people talk about getting rid of payday lenders without even realizing that their demand is there. Their demand is there because the wages have been decreasing since the ‘70s. since income volatility has doubled, it has become harder for people to predict how much money is going to come week to week. Even though the costs are high, isn’t it better to have access to expensive credit than not having access to any credit? She also urges people to realize that access to funds is expensive no matter where they turn – traditional or non-traditional.
Servon made an observation that even though the payday loans, wire transfers and check cashing are high, they are known commodity. People can find brightly colored, large signage all over the locations and customers are aware of exactly what they are paying to make use of funds.
Banks can also be just as expensive or maybe even more, but not in very obvious ways.
She says that the signage found in the bank teller windows resemble the ones that can be seen at a fast-food restaurant, such as McDonald’s. It says that it costs 2.03% the face value of your check to cash it, $1.50 to pay a bill, $0.89 for a money order.
She noted that with banks there is no immediate access to funds and checks can take a day or 2 to get cleared. In case other expenses hit an account during that window, the overdraft fees start at $35. 44% of the banks still stack charge to accounts to maximize the number of fee overdrafts that can be charged. Account service fees, ATM fees are charged if a minimum balance is not maintained. For marginal consumers, banks can prove quite expensive.
Payday cash advance providers are a boon for the millions of American consumers who are underbanked. Servon said that it is important that this industry remains so that millions of Americans have access to funds.