grounds for competition: the basic financial service infrastructure in low-income … ·...
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
Metropolitan Policy ProgramMatt Fellowes, Senior Research Associate
The Brookings Institution
Grounds for Competition: The Basic Financial Service Infrastructure in Low-Income NeighborhoodsThe High Cost of a Low Income: Financial Services in Underserved MarketsLouis L. Redding Public Policy Forum, University of Delaware
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
Why are we asking these questions?
Grounds for Competition: The Basic Financial Service Infrastructure in Low-Income Neighborhoods
I
What are the major findings?II
How is the market and public policy responding? III
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
We’re in the middle of a multi-year study that is evaluating how prices for basic goods and services vary by income
Food
Housing
Utilities
Furniture/Appliances
Transportation
Insurance
Other (e.g., fin. services)
Why?
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
Low-wage families pay higher prices than higher income households for nearly every basic necessity
Fixed Price
PricePremium forLow-IncomeFamilies
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
The implication is that lowering prices for low-income families is a powerful, and widely underutilized tool to fight poverty
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
Income & BenefitSupplements
Lower theHigher Prices
Traditional anti-poverty strategies
Emerging anti-poverty strategies
Annual Income
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
In July ‘06 we will publish our second report in this project, an analysis of prices for necessities within 12 markets
Today, I want to give you a preview of our findings, by presenting some evidence related to the higher prices low-income consumers tend to pay for: short term loans and cashing checks
This forthcoming report will provide extensive evidence of these higher prices, along with an agenda for policy and market-based reforms to lower these higher prices
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
Over the past decade, policy, social, and economic trends triggered massive growth in the demand among low-income families for these basic financial services
Welfare reform spurred millions of low-income adults into the workforce
Immigration is at a recent high, many of whom have lower incomes than the national average
Wages have not kept pace with inflation through much of this period, particularly among low-income workers
DEMAND
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
Market entrepreneurs responded to this surging demand with new establishments, market products, and business models.
SUPPLY
Much of this entrepreneurship and innovation was spawned by new businesses rather than traditional, mainstream financial institutions.
The result is that low-income neighborhoods have a very unique infrastructure of financial services
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
As has been well documented, the outcome of these changes is that low-income consumers tend to utilize higher-priced providers of short-term loans
$23300%0%11.5%$200Auto-title Lender
$1.2012%1%0%$200
NCSECUCredit Union(Payday Loan)
$20120%0%$20$200OverdrawnChecking Account
$30390%0%15%$200Payday Lender$31403%15%$1$200Pawnshop
$791%1.5%2%$200Credit Card Cash Advance
$318%1.5%0%$200Credit Card
TotalMonthlyChargeAPR
Monthly Interest RateFee
MonthlyAdvance
Examples of Sources
Note: All estimates based on published analyses, but APRs widely vary across both places and companies; the credit union pay day loan is based off of the North Carolina State Employees Credit Union program Also, all sources are assumed to be utilized once per-month.
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
It is also widely known that low-income consumers are now more likely than other consumers to utilize check cashing services
Unlike most banks and credit unions, check cashing services charge a fee (usually 2-5% of the face value) to cash checks
Using this service makes sense for households who would frequently overdraw a checking account, but most researchers assume this is a small part of the population
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
Among the numerous causes, many have pointed to problems associated with access to mainstream products
Alternative providers (e.g., check cashers, pawnshops, payday lenders, & auto-title lenders) target low-income consumers
Mainstream providers (e.g., banks, credit unions, credit cards) dissuade low-income consumers
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
But, much of the data that speaks to these issues is out-of-date because this market is rapidly growing. For instance:
7,000
300
14,000
25,000
Number of Pawnshops Number of Payday Lenders
1980s Early1990s
Today Today
Note: Estimates are from John Caskey (Fringe Lending) and Sheila Blair (Low-Cost Payday Loans: Opportunities and Obstacles)
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
This leaves important questions unanswered..
Where is all of this growth happening?
What implications do these trends raise for public policy and the market?
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
Why are we asking these questions?
Grounds for Competition: The Basic Financial Service Infrastructure in Low-Income Neighborhoods
I
What are the major findings?II
How is the market and public policy responding? III
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
Across the 12 metropolitan areas in our sample, there are approximately 5,243 alternative providers of check cashing and short term loan services, collectively earning about $3.2 billion in annual revenue.
DEMAND
SUPPLY
+ =LARGE MARKET OPPORTUNITY
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
The highest per-capita number of alternative check cashing and short term loan providers tends to be in the lowest income neighborhoods of metropolitan areas. For instance:
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000
$120,000+
90,000 – 119,999
$60,000 – 89,999
$30,000 – 59,999
$0 – 29,999
Median Neighborhood Income
Population Per Establishment
For every one alternative provider in an Atlanta neighborhood with this median income, there are 7,030 residents
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
The same trend is found if we look at only the central cities ofthese metropolitan areas. For instance:
Median Neighborhood Income
Population Per Establishment
For every one alternative provider in a LA neighborhood with this median income, there are 6,882 residents
0 10000 20000 30000 40000 50000 60000 70000
$120,000+
90,000 – 119,999
$60,000 – 89,999
$30,000 – 59,999
$0 – 29,999
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
This evidence suggests that alternative check cashing and short-term loan providers tend to be more densely concentrated in low-income neighborhoods
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
But, the majority of these alternative financial service providers in metropolitan areas tend to be located in more moderate income neighborhoods. For instance:
Median Neighborhood Income
Proportion of the Core Providers of Alternative Checking and Short-Term Lending Services
0% 20% 40% 60% 80% 100%
$120,000+
90,000 – 119,999
$60,000 – 89,999
$30,000 – 59,999
$0 – 29,999
In Seattle, 77 percent of these alternative providers are located in neighborhoods with a median income in this range
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
The same trend is reflected in 9 of the central cities within these 12 metro areas. For instance:
Median Neighborhood Income
0% 10% 20% 30% 40% 50%
$120,000+
90,000 – 119,999
$60,000 – 89,999
$30,000 – 59,999
$0 – 29,999
Proportion of the Core Providers of Alternative Checking and Short-Term Lending Services
In New York city, 58 percent of these alternative providers are located in neighborhoods with a median income above $30,000.
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
This evidence suggests that most alternative check cashing and short-term loan providers tend to be located in moderate income neighborhoods.
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
The natural market competitor to these alternative financial service providers are mainstream financial institutions. Do they have the infrastructure to compete?
In our sample of 12 metropolitan areas, there are about 14,423 banks and credit unions.
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
In all but two of the 12 metro areas, mainstream financial institutions are more densely concentrated in low-income neighborhoods than alternative providers of check cashing and short term loan services. For instance:
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Chicago MetroArea
Seattle MetroArea
New YorkMetro Area
IndianapolisMetro Area
Los Angeles-Long BeachMetro Area
Hartford MetroArea
Atlanta MetroArea
Banks and Credit UnionsAlternative Providers
Population Per Establishment
in Neighborhoods with a Median Income Less Than $30,000
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
The same trend is found if we look at only the central cities ofthese metropolitan areas. For instance:
Population Per Establishment
in Neighborhoods with a Median Income Less Than $30,000
0
5000
10000
15000
20000
25000
Chicago Seattle New York Indianapolis Los Angeles Hartford Atlanta
Banks and Credit Unions
Alternative Providers
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
This evidence suggests there actually is more of a “product desert” than a “retail desert” in most low-income neighborhoods
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
All of this adds up to a few central conclusions:
1. There is a very large market for alternative check cashing and short term loan services – over $3.2 billion in our sample.
2. This revenue is being generated in a diverse set of neighborhoods.
3. Mainstream financial service companies have a substantial infrastructure in place to compete with these alternative providers
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
Why are we asking these questions?
Grounds for Competition: The Basic Financial Service Infrastructure in Low-Income Neighborhoods
I
What are the major findings?II
How is the market and public policy responding? III
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
The massive expansion in the alternative check cashing and short-term loan market has caught the attention of state policymakers
Source: Matt Fellowes (Laboratories of Capitalism)
0
10
20
30
40
50
60
70
80
90
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Num
ber o
f Bills
in S
tate
hous
es
Payday LoansPawnshopsAuto-title loans
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
It has also caught the attention of mainstream providers of financial services
Credit unions are entering the payday loan market
Banks are exploring new, competitively-priced short-term loan products, and are increasingly competing for checking account customers
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
Going forward, this means that the alternative lending market may actually become a victim of its own success
Policymakers can encourage this by:
1. Continuing to challenge the business model of alternative providers of these basic services
2. Curbing market demand for high-priced, short-term loans from mainstream providers
3. Fostering incentives for market innovation and competition in this market
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THE BROOKINGS INSTITUTION METROPOLITAN POLICY PROGRAM
www.brookings.edu/metro