There is one banking facility on the central west side of Evanston, but there are two payday loan stores near the intersection of Dempster Street and Dodge Avenue.
Peter Braithwaite, alderman of the Second Ward, whose commercial heart is that intersection, says he would like to see those facilities leave.
On May 16, the City of Evanston and United Way of Metropolitan Chicago and the North Shore United Way co-sponsored a financial workshop on the topic of how to facilitate access to traditional banks for those who now use payday loans, currency exchanges and pawn shops for quick money. “We hope to create policies to put payday loans out of business,” he told the some 60 representatives of financial institutions and social service agencies who serve low-income families and individuals (in the Parasol Room of the Morton Civic Center).
Ald. Grover said there are several dimensions to the problem. “There is the family dimension, and what [the presence of payday loans] says about a neighborhood. And we’re trying to starve out what feels like businesses with predatory practices.”
In the financial world such facilities, as well as pawn shops, check-cashing facilities and “rent-to-own” businesses, are called “alternate financial services” (AFSs) or “fringe banks,” said Dr. Robert Mayer of Loyola University.
Those who exclusively use fringe rather than traditional banks are termed “unbanked”; those who use an AFS at least twice a year in combination with traditional banks are considered “underbanked,” said Dr. Mayer.
“Fringe banks are very good at what they do, and they serve a need,” he said. Nine million households in this country – 8 percent – are unbanked, Dr. Mayer said. That number has held steady or declined over the past several years, while the number of underbanked households – now about 21 million or 18 percent – has increased steadily over the past 30 years. He said nationwide, the population that uses fringe banks is typically minority – 42 percent of Hispanics, 54 percent of African Americans and 18 percent of Caucasians. About half of the fringe banking population has an income below the poverty level, “so about half of the underbanked have higher [than poverty-level] incomes.”
The solution to the problem of the unbanked and underbanked will not be easy or straightforward, he said.
Two Sides of Fringe Banks
The appeal of a fringe bank is the flip side of the barrier to traditional banking: convenience, ease of transaction, few questions asked.
“Fringe banks … make it easy for people to go into debt,” said Dr. Mayer. “Most people will express satisfaction with the [payday] lender but not with the cost.” The average payday loan has a 450 percent annual percentage rate (APR), he said, and most credit cards have about a 36 APR.
Patricia Hunter, manager of economic empowerment at the Evanston/North Shore YWCA said she teaches a six-hour financial course about predatory practices and encourages the clients to go to a bank or to First Northern Credit Union, but no one has followed up on that. Ms. Hunter says many of their low- and moderate-income clients “are just reluctant to go into a bank.”
Supply and Demand Foster Growth of Fringe BanksProfessor Robert Mayer of Loyola University is author of “”Quick Cash: the Story of the Loan Shark,”” a history of payday lending in the United States.
He said alternative financial services, or fringe banks, have a long history, but the 1980s saw “”the real take-off for fringe banking.”” Pawn shops, he said, are “”ancient””; check-cashing was born in Chicago in the 1930s. “”Rent-to-own”” housing became prominent in the 1950s, and payday loans in the 1980s.
He said forces of both supply and demand explain the growth: “”Fringe banking is growing at the intersection of supply and demand.”” The main factors on the demand side are the “”growing stress on the population,”” job volatility, which resulted in erratic income streams for households, and the decline in savings. Interest-rate deregulation, technological changes that help assess risk, and the tendency of banks to allow more overdrafts (at a cost) are on the supply side of fringe banking.
“”The relationship between [traditional] banks and fringe banks is a competitive symbiosis. The feelings of each side feed into and create the market for the other,”” he said.
Credit – the “”nice term for debt”” – became more accessible “”to the bottom half [in income] of the population,”” but the poor pay more for credit in the form of a “”risk premium,”” Dr. Mayer said.
“”Can we say these people are worse off than if [fringe banks and easy credit] were not available? Scholars don’t exactly know,”” he said.