Nobody is more articulate about the wrongheadedness of the US government’s vendetta against the payday lending industry than Tom Brown of Second Curve Capital, writing at bankstocks.com. Tom recently wrote:
“If the federal government wants to put an end to payday lending, Congress should act, or at least the CFPB should write some rules that would restrict it. In the meantime, the business is legal, and regulated to varying degrees, in 37 states. The Justice Department’s “Operation Choke Point”—wherein DoJ browbeats banks into refusing to provide banking services to businesses, like payday lending, it deems unsavory—is an outrageous infringement on voters’ sovereignty. The project is un-American in a very basic way. Payday lenders are doing the right thing in fighting back.”
Agreed. Tom goes on to say:
“What’s more, payday lenders actually provide valuable service. You may not like it, but the fact is that occasionally low-income consumers need emergency cash to, say, pay an electric bill or get the car repaired so they keep showing up for work. In cases like that, the alternative to paying the emergency bill—the lights going out or the loss of a job–is much worse than the extra interest the payday borrower has to pay. Absent a payday loan, the borrower’s only other choice is to intentionally overdraw his account.”
I don’t want to sound like I disagree with Tom on this, because in spirit, I do agree. However, the consumer research I’ve done paints a slightly different, and more nuanced, picture.
The fact about payday loan borrowers is that they are not all low-income consumers. And for many payday loan borrowers, it’s not a choice between a payday loan and overdrawing on the checking account–it’s both. In fact, for many payday loan borrowers, it’s not just a payday loan and overdrawing, it’s that and borrowing from numerous sources.
In Q2 2013, Chase Blueprint commissioned Aite Group to survey US consumers about their financial lives, and how their financial lives changed from pre-recession days (2008) through the depth of the recession (2010) to post-recession days (2012). Here’s what we found:
1) Payday borrowing is on the rise. The percentage of consumers taking out a payday loan in 2012 (7.6%) was slightly higher than it was in 2010 (6.4%), which represented a dip from 2008 (6.8%). The percentage who took out three or more payday loans in each of the years was consistent, however, at about 2.2%.
2) Payday loan borrowers are not low-income consumers. Among consumers who took out a payday loan in 2012, 38% earn more than $70k per year, 32% earn between $30k and $70k, and just 30% earn less than $30k. About a third of payday loan borrowers are “old” Gen Yers (between 27 and 35 years old).
3) Payday lending is not evenly distributed geographically. Almost four in 10 payday loan borrowers live in Western states which only account for 24% of the population. In contrast, northeastern states, representing 19% of the population, produced only 10% of payday loan borrowers in 2012.
4) Payday loan borrowers borrow from many sources. Unfortunately for many payday loan borrowers, it’s not a choice between getting a payday loan and overdrawing. In 2012, three-quarters of payday loan borrowers paid an overdraft fee–and one in five paid that fee three or more times. Slightly more than half of payday loan borrowers took out a direct deposit advance and a small loan from their bank or credit union in 2012. 16% took out a small loan from their bank/credit union three or more times. Seven in 10 payday loan borrowers borrowed from friends or family in 2012, a quarter doing so three or more times. Fifty-five percent of payday loan borrowers borrowed from a pawn shop in 2012, and 43% borrowed from a loan shark.
5) Payday loan borrowers tend to be habitual payday loan borrowers. Among the consumers who took out at least one payday loan in 2012, 42% did so in 2010 and 2008, as well.
It’s probably not a very kind or tactful analogy, but payday loan borrowers are like drug addicts–they have a problem. Going after payday lenders is like shutting down the small neighborhood drug dealer. That might it make it more difficult for the drug addict to get his fix, but does absolutely nothing to address the problem.
Payday loan borrowers have a problem managing their money.
That’s a conscious choice of words–because they have money to manage. They have jobs. They’re not stupid–37% have a college degree (vs. 43% of consumers who didn’t take out a payday loan in 2012), in fact, more than one in 10 of them even have a post-graduate college degree.
Yet, 38% of payday loan borrowers consider themselves to be financially illiterate (in contrast to 15% of consumers who don’t take out payday loans). Almost a quarter of payday loan borrowers consider their financial lives to be very complex (vs. 16% of other consumers). Despite their income and education levels, nearly half of payday loan borrowers consider their financial health to be “poor” or “very poor” (in contrast to 18% of other consumers).
Are you getting the picture here?
Cutting off the supply of payday loans to payday loan borrowers only results in forcing these consumers to find other sources of money. Sources like friends and family who are likely tired of lending to these people, banks and credit unions who may be likely to turn them down for loans, and loan sharks who are hardly a better alternative to the often-regulated payday lending industry.
Operation Chokepoint is yet another bone-headed (not to mention, possibly illegal) effort on the part of the US government and its henchmen (yeah, you know who I mean) to pick some ideological bone it has with the financial services industry.
Sadly, this is anything but in the best interest of the people who rely on payday loans to make ends meet.