Fringe Banking

Banks don't want her business. So when Pacquin Davis needed to cash her welfare check one recent Tuesday evening, she went to the Shopper's Market around the corner from her apartment in an Atlanta public housing complex. The grocer charged her $3 to cash the $390 check.

Davis pays her rent with money orders. They usually cost 69 or 75 cents. When she needs a small loan around Christmastime, she pawns her air conditioner at Fulton Loan Office. The pawn shop charges interest of 20 percent a month on its loans -- which equals an annual rate of 240 percent.

Davis and her five children -- like an estimated 20 million families -- are part of America's growing non-bank economy. Thousands of new pawn shops and check-cashing outlets -- sometimes called "fringe banks" by economists -- have sprung up across the country to serve them.

Since 1987, the number of check-cashing outlets has jumped from about 2,000 to about 5,000 -- a figure that doesn't include the thousands of inner city grocers, liquor stores and pawn shops that cash checks for a fee. The number of pawn shops, on the decline just a decade ago, has nearly doubled since 1986. Now there are almost 9,000 nationwide.

The costs for their services are high: Check cashers generally charge from 1 percent to 10 percent of a check's value to turn it into cash. Pawn shops charge interest rates that run as high as 300 percent a year in some states. The explosive growth of these businesses is a legacy of the 1980s, when poverty grew and state and federal legislators weakened consumer-protection laws. Fringe banking thrives off low-income people who have been virtually locked out of the mainstream banking system.

In the past 15 years, the portion of America families without a bank account has increased from 9 percent to 14 percent, according to the Federal Reserve. Some avoid banks by habit or choice. But most can't afford the fees and minimum balances that banks demand on checking accounts. Others live in areas -- usually poor or black neighborhoods -- where banks are scarce.

Davis, 25, would like to have a bank account. But First American and Georgia Federal banks turned her away because a furniture store left a bad mark on her credit history five years ago.

She said Georgia Federal refused to even allow her to open a savings account. Her Legal Aid attorney, Dennis Goldstein, said at least a dozen of his clients have been turned down for saving accounts at Atlanta banks because of bad credit. That makes absolutely no sense, he said, because there is no chance of bounced checks with savings.

"Whoever made that rule or that law about the banks, I wish they would change that," Davis said. If her money was in the bank, "I wouldn't too much want to go and get it and spend it. So if the kids say, 'Momma, we need some shoes for a school program,' I could go down to the bank and get the money." Fringe banking is one symptom of how the economics of poverty -- especially inner-city poverty -- makes poor people poorer. Because she has little money and lives in an low-income neighborhood, Davis pays extra for just about everything.

She doesn't have enough money to get free or interest-paying checking at a bank.

Because she can't pay cash, she buys her furniture and appliances at rent-to-own stores -- which charge two or three times what she would pay at major retail stores.

To get a $75 loan at a pawn shop, she must pay $15 a month in interest. Charging the same amount on a credit card would cost her little more than a $1 a month in interest.

She even pays more when she shops for food at the grocer that cashes her check. A gallon of milk, for example, recently cost $2.99 at the downtown market, compared to $1.79 at an A&P supermarket in suburban North Druid Hills.

There are many reasons for the higher prices poor people must pay, including the greater insurance and overhead costs faced by merchants in low-income neighborhoods.

For their part, check cashers and pawn brokers bristle at suggestions that they take advantage of low-income people.

Jerome Gagerman, a Chicago businessman, owns 20 check cashers in California, Illinois, Maryland and Washington, D.C. He said check cashers like his provide a vital service to people who have turned off by the high fees that banks started charging after the federal government deregulated the banking industry in the early 1980s.

Gagerman said check cashers' fees aren't much different from what banks charge -- even though they take bigger risks than banks.

"What they do is give people their own money," Gagerman said. "We risk our own funds." When a check turns out to be bad, check cashers can't dip into a customer's bank account -- as banks do -- to recoup the loss.

Check cashers say that, along with low-income customers, they also serve people who need the same sort of convenience that 7-Eleven stores offer grocery shoppers. In fact, a survey by the Consumer Bankers Association found two-thirds of the people who used check cashers had bank accounts. Many came to check-cashers because they had better hours, better locations, and shorter lines.

But poor people often have different reasons. A 1988 study by the Consumer Federation of America found that 71 percent of banks and S&Ls would not cash government checks for non-depositers. And some working people who struggle from paycheck to paycheck need their money right away to pay bills. They go to check cashers because they can't wait days for their paychecks to clear at their banks.

Check cashers have been doing business in big cities since the Depression-era banking crisis. Pawn shops have been fixtures across American for more than a century. But both industries have been working hard in recent years to shed their old images as seedy, mom-and-pop operations.

Chain outlets with upscale looks and impressive profits now dot cities and suburbs, with names like Mister Money, Check X Change, Almost-A-Banc and Cash America. Many operate in suburban strip malls next door to hair stylists and drug stores.

But while fringe banks have pulled in some middle-income consumers, the vast majority of their customers are people stuck on the bottom third of economic ladder. John Caskey, a Swarthmore (Pa.) College economist who has studied pawn shops and check cashers, says many of their customers are the forgotten suburbanites -- working people who live above the official poverty level but still have a hard time getting by.

They often don't realize the price they pay for using a check-cashing service, Caskey said. "They don't really think about how fast $5 a week over a year adds up to a big chunk of their income."

He estimates that a bank-less family earning $16,500 spends nearly $300 a year on check cashing and money orders to pay bills. If it had a checking account, the same family probably would spend little more than $100 a year on minimum-balance penalties and other fees.

Alan White, a Legal Aid lawyer in Philadelphia, said the check-cashing industry is an example of how mainstream businesses use smaller entrepreneurs to insulate themselves from poor people. Check-cashing places cash their customers' checks and then take them to deposit in a bank. White said that allows banks, from their point of view, to make money off the low-income market "without having to pollute their waiting rooms with these poor people."

In 1988, one of White's clients won a federal court ruling against a Philadelphia check casher who had charged him $1,156 to cash $11,171 in back payments from Social Security.

The client, Carl Wernly, testified that when he questioned the fee, the check casher told him -- incorrectly -- that he would have to pay at least $3,000 in taxes if he put the money in the bank.

The judge ruled that the $1,156 fee was unfair. He ordered America Check Cashing to give Wernly a $932 refund.

Similar stories cropped up in 1992 when big Social Security checks went out to thousands of families across the nation to settle a lawsuit over children who had been wrongly denied benefits.

Dolores Hagler, the agency's New Orleans district director, said one parent told her office that a check casher had charged her 50 percent to cash a $16,000 government check -- an $8,000 fee -- because she didn't have an I.D. The agency called the check casher, but it refused to verify or discuss the charge, Hagler said. Other parents reported paying fees from 3 percent to 10 percent -- often hundreds of dollars -- to exchange their settlement checks at check cashers.

For most customers, though, it's a matter of nickels and dimes that add up. Jerome Knights, 38, has worked in day labor pools and eaten in church soup kitchens since drifting to Atlanta from Florida a few months ago. "I went to the bank a couple times to cash a check. 'No we don't cash that check.' I said, 'Ma'am, this is a company check. They said, 'They don't have an account here.' " So he goes to check cashers or grocery stores to turn his small checks from a day's work into cash. "Believe it or not, if it's $12, you pay a dollar," he said. "I have paid up to $1.29 for a $14 check."

Many check cashers and pawn shops have increased business by becoming one-stop financial centers for people who are bankless. They sell money orders, subway tokens and lottery tickets, make wire transfers, take payments for electric and water bills, distribute food stamps.

Many do tax returns and offer "fast tax loans" to customers who need their IRS refunds quickly. Fringe banks charge fees reaching $100 or more for short-term, high-interest loans against customers' expected IRS checks.

Another service is "payday loans": They will cash a customer's personal check and agree to hold it until the customer gets his next paycheck and can deposit his wages in the bank. For the service, they charge steep interest rates that may be is illegal in some states.

All this can up to big profits. A study by John Binder, a University of Illinios-Chicago finance professor, found that Illinois check cashers earn 10 to 20 times higher "return on equity" than banks. In November 1987, Entrepreneur magazine told its readers they could open a check-cashing outlet with an investment as small as $65,000 and pull in before-tax profits as high a $117,000 a year.

Thanks partly to numbers like those, mainstream corporate America has started to get over its long-held hestitancy about getting involved in fringe banking.

Western Union, which already dominates the profitable money-transfer business, has plunged into a joint venture with Nix Distributor Inc., a southern California check-cashing chain. NationsBank is helping First Cash, a small Texas-based pawn shop chain, grow by extending it a $3.5 million line of credit.

The pawn industry owes much of the credit for its new, glossier look to its biggest player: Cash America. The chain has more than 200 stores across the South and Ohio -- and plans to expand into every state in the union.

Jack Daugherty, a Texas oil man, founded Cash America in 1983 with a vision of a vast empire of pawn shops united by a well-scrubbed, cookie-cutter look. Cash America has poured money into advertising, public relations and charity drives -- and its shares have split twice since it went public and joined the New York Stock Exchange in 1987.

Profits are virtually assured at a well-run pawn shop. Most pawn brokers will loan only one-quarter to one-half of an item's value -- so they can sell unclaimed items at a nice profit.

One money maker for many pawn brokers in the past few years has been car-title pawns. It works this way: Customers bring in their titles and an extra set of their car keys. They get a loan and drive away. If they don't pay back the loan, however, the pawn broker gets their car.

Lawyers for low-income people in Georgia say car-title loans have become a big business by preying on people desperate for cash, charging annual interest rates that have reached as high as 960 percent.

One 66-year-old client of Atlanta Legal Aid pawned his 1979 Mercury Cougar for $300. He agreed to pay back $545 over 12 weeks.

He fell behind toward the end and the pawn broker tacked on late charges and threatened to put him in jail. So he went to Legal Aid. His attorney found the loan contract had understated the annual interest rate -- listing it at 24 percent even though the real rate was 550 percent.

When his attorney threatened to sue, the pawn shop backed down and forgave the rest of the loan.

"These people exist on people like myself who are stuck and broke," said the man, who was embarassed and asked his name not be used. "If I haven't got a car, it means I'm dead in the water. So they knew that and it means they can charge most anything they want."

Most states set interest caps on pawn shop loans, ranging from 1.5 percent to 25 percent a month. In at least half the states, pawn shops can charge rates equal to at least 120 percent a year. And in somes states where the ceilings are low, Caskey said, the limits are widely ignored.

Check cashers are even less regulated. Eight states -- Connecticut, New Jersey, New York, Illinois, Delaware, Minnesota, Georgia and Rhode Island -- limit the fees that check cashers can charge. In Georgia, the maximum fee is 3 percent for public aid checks, 5 percent for payroll checks and 10 percent for personal checks.

Even when there are limits, some check cashers may ignore them. A 1988 report by the New Jersey Public Advocate, a state agency, estimated that check cashers in the state were overcharging customers $1.2 million a year in illegal fees.

With little success in regulating fringe banks, consumer advocates have focused their complaints on traditional banks. They say poor people turn to the expensive alternatives because banks turn them away. Before the riots in South Central Los Angeles, its 585,000 residents were served by at least 133 check-cashing outlets -- but just 19 bank and S&L branches.

Banking officials say more and more banks are offering low-cost checking accounts, but that some people simply can't be served by banks. One banker told the New Jersey Public Advocate that his bank did not have room for the "welfare crowd."

In Atlanta, Carrie Copeland has been trying for years to get downtown banks to make it easier for her fellow public housing residents to open checking accounts. Copeland is president of the tenants council at Capitol Homes. She would like to see banks' minimum balances -- which generally run from $100 to $200 -- lowered to $25.

"The banks are good at everything except banking," Copeland said without sarcasm. "Other things, helping us at in the community, they're very good at that. They give food at Christmastime. They never turn us down on good things like that. But we want to go a step further. We want to save a little money."