Fringe financial services like check cashing storefronts, pawn shops and payday lenders carry plenty of stereotypes. Namely that their patrons are not well off and likely made up of the working poor who may not have college educations. That stereotype may be breaking in the wake of the 2009 financial crisis and the recession that followed. Increasingly, consumers going outside mainstream banking look a lot more like, well, the American middle class.
A recent study conducted by the Urban Institute found that, in 2011, 41% of American households reported using what the agency calls “alternative financial services,” according to Boston College’s Center for Retirement Research. That’s up from 36% in 2009, in the midst worst recession since the Great Depression. About a quarter of all households used an alternative financial service within the past year, F.D.I.C. data studied by the Urban Institute revealed, and about 12% had used one in the 30 days prior to the research being conducted. These non-bank services include borrowing activities as well as transactions like cashing a check or buying a money order.
The growing use of prepaid debit cards is one contributor to these numbers, but decreasing financial stability also plays a significant role. About 14% of households turn to what the Urban Institute calls “nonbank credit,” a term encompassing payday lenders, pawn shops, rent-to-own contracts or tax refund anticipation loans. Roughly one in six used these services for the first time between 2009 and 2011. Nearly half said they did so just to meet basic living expenses.
Since 2009, the number of non-Hispanic whites using these high-priced credit products went up by five percentage points, while usage among Latino and black Americans dropped. People over the age of 55 are using these products more, as are college graduates.
About two in five people who use payday loans or who get loans from pawn shops do so because they think it’s easier or more convenient, researchers found. About half that number say they can’t get a small-dollar loan from their bank. The flip side of this convenience is that such providers typically charge high interest; the Center for Responsible Lending found that when interest and fees are added up, payday loan borrowers often wind up paying the equivalent of triple-digit APRs.
The most surprising increase came when the Urban Institute broke down use of products like payday loans by income. The poorest Americans, those who make $15,000 or less a year, actually scaled back their use even as wealthier people — those who conventional wisdom would assume had access to banks and credit cards — turned to alternative financial products in higher numbers. Among households with incomes between $50,000 and $75,000, the number went up by about a percentage point; for households earning over $75,000, the jump was two percentage points.
“The adverse effects of the recession on household economic well-being were felt across a wide range of economic and demographic sub- groups… disproportionately so in segments of the population normally considered economically advantaged: older, nonminority, better educated, married, and higher income,” researchers wrote.