Good Read: "Check Cashers, Redeemed"

I just had the pleasure of reading a very interesting and thorough article on the alternative financial services sector in California published in The New York Times Magazine: Check Cashers, Redeemed by Douglas McGray. It chronicles the life of Nix Check Cashing, growing from its humble beginnings as a service offered to customers of Tom Nix's father's delivery business in the early '70s to the largest check casher and payday lender in California, sold last year to Kinecta Federal Credit Union.

There are many interesting aspects to this article and I won't go into all of them, but there are two I would like to highlight. First, the purchase of Nix by Kinecta is a rare foray into alternative financial services by a mainstream bank or credit union. They have taken the novel approach of placing Kinecta kiosks in Nix locations and have continued, with some variation, Nix's check cashing and payday loan services. They have also kept owner Tom Nix on board as an executive.

The second piece that I wanted to pass on was some of the data and commentary on why customers in California, and the broader United States, choose payday loans and the banks' relationship to this product's success:

"In the late 1980s, when a few check cashers started to accept postdated personal checks and advance cash for a fee, Nix thought it was a sleazy scheme. He thought so even after California legalized the practice in 1997. 'I didn’t want to be a loan shark,' he told me. 'But the reality is, customers wanted it.' He told (Kinecta president and CEO, Simone) Lagomarsino why. A bounced check, a fee to reconnect a utility, a late-payment fee on your credit card, or an underground loan, any of those things can cost more than a payday loan. And then there are overdraft charges. 'Banks, credit unions, we’ve been doing payday loans, we just call it something different,' Lagomarsino says."

The article also includes some staggering trends on the direction that bank and credit card fees have been heading recently:

"Bank of America took heat earlier this year for more than doubling the interest rate on some credit-card accounts, even if the cardholder pays every bill on time. Banks, meanwhile, have nearly quadrupled their fee income in the last decade, according to the F.D.I.C., while credit-card late charges and over-limit charges have nearly tripled. Fees imposed on customers for temporarily overdrawing their accounts — by accident or on purpose — have been particularly lucrative; banks made $25.3 billion in 2006 on overdraft-related fees, up 48 percent in two years, according to the Center for Responsible Lending."

While McGray draws a clear connection between the cost of bank fees and credit cards and the rise of check cashing and payday loans, he does not gloss over some of the trouble spots within the alternative financial services sector. He talks about the high cost of over use of check cashing and payday loans and speaks to customers who are well aware that their choice is not a cheap one. In the end, he demonstrates how the banks have failed to serve an entire segment of the population and how companies like Nix have stepped in to fill the void, with unparalleled service, openness and transperency, and a mission to do whatever it takes to say yes to their customers.

With their acquisition of Nix, it seems like Kinecta is making it pretty clear that they get it. They realize that mainstream financial services companies have missed the boat on a segment of the population and they are counting on people like Tom Nix to help them figure out how to win them back.

Bank Fees Have Ohioans "longing for a payday loan"

Ohio banks and their ever rising fees have this Cleveland resident longing for the days when payday loans were available in that state: Bank fees will have you longing for a payday loan

Study: Oregon Households Hurt by Payday Ban

A new study from Prof. Jonathan Zinman of Dartmouth College was released last week that looked at the effect of a payday loan ban on Oregon households. Like the 2007 New York Federal Reserve report, Payday Holiday, this study found that households fair worse in a state that has banned payday lending.

The study claims that, in the absence of payday loans, borrowers are forced to choose "inferior substitutes," and "restricting access (to payday loan credit) caused deterioration in the overall financial condition of the Oregon households."

Mainstream Lenders Cranking Up Fees

It looks like the big lenders are trying to pass the pain of the credit crunch on to consumers any way they can. There have been several articles lately about Visa's move to increase their rates and the rising cost of bank fees. Here are two:

CityNews: Visa Rates Skyrocket - Just In Time For The Holidays
"Starting next month, Visa is boosting its interest rate for customers who miss two consecutive minimum payments - ensuring those most in debt will be the hardest hit."

Wall Street Journal: Banks Boost Customer Fees to Record Highs
"Banks are responding to the troubled economy by jacking up fees on their checking accounts to record amounts."

PEI Comes on Board

Over the past 18 months, most Canadian provinces have been engaged in the process of launching payday loan legislation and determining maximum allowable rates. Manitoba, Nova Scotia, Ontario, Alberta, British Columbia, Saskatchewan and New Brunswick have all engaged industry and consumers to determine how best to develop effective regulations. Yesterday, PEI came on board by launching its own consultation initiative. Attorney General Gerard Greenan is seeking input by December 31st. Here is what you need to know:

Article: Province Seeks Opinions on Payday Loans
Consultation Document: here
Draft Legislation: here

ACORN Member Calls Payday Loan Customers "the wrong element"

People who use payday loans and the companies who provide them understand that they fill a need for hard working Canadians who are tight on credit and often facing an unexpected financial crunch. The latest study of who uses payday loans and why is a study of Alberta payday loan users by Pollara on behalf of the Canadian Payday Loan Association and is available here.

While people who use the product rate it favourably, what continues to resonate in the media is that people who don't use it take a different view. One example of this is a recent quote from ACORN member and candidate for city council in New Westminster, BC, David Tate, who complained that payday loan locations "bring the wrong element to the city."

ACORN is a community organization that has most recently made the news in the United States for their role in a voter registration scandal. In Canada, they describe themselves as "the nations largest community organization of low- and moderate-income families." They list among their priorities, advocating for regulation of payday lenders, a priority they share with the Canadian Payday Loan Association, the British Columbia Payday Loan Association and a host of other industry and consumer representatives.

While I may be stating the obvious here, I find it somewhat concerning that a member of an organization that claims to be advocating for the people who use payday loans would describe them as "the wrong element."

What is also concerning is that Mr. Tate is pushing for a limit to how many payday loan locations can be in the downtown core, relying on his claim that these locations are attracting the wrong people to the neighbourhood. If there are enough people who live and/or work in the downtown core to support several payday loan locations then whose role is it to say that people should not have access to a variety of providers? And how is that advocacy? I find it hard to believe that there are any payday loan users asking for a reduction in locations.

Businesses open locations where there are enough people to support those locations, if there weren't, they would close. It is pretty basic supply and demand. And in case you are wondering, it is not a 'chicken vs. egg' argument. Think of other industries. Banks don't open a location where there are few bank users. They find locations where their customers work and/or live. They don't put a branch in the middle of nowhere and then hope that customers will make extra time in their day to visit that branch.

The other piece of this topic that is equally troubling is the notion that the public would be served by limiting competition for a product. By restricting the number of locations for any type of business, you are making the businesses who do get a license incredibly more wealthy and far less interested in enhancing their services or efficiency. Why would they? If there is no threat from 'the guy down the street' offering a cheaper product or better service or longer hours?

Consumers love competition and businesses hate it. Ask any business owner and they will tell you that they would much rather have a monopoly than a highly competitive market. Advocates like ACORN need to make better use of this fact if they are to be truly effective in their quest to improve products and services on behalf of the people they represent.