How the working poor became big business
I expected to see a lot of polyester and plaid and more than a few bad toupees when I attended the 20th annual check cashers convention in Las Vegas a couple of years back.
Instead I found men in khakis and blue Oxfords, and women with well-coiffed hair, red-polished nails and dressed to the nines. The halls of the convention center were thick with battalions of their underlings, all wearing matching corporate colors and logo-stamped polos advertising the name of one large chain or another.
I had a similar experience hanging around with the country’s pawnbrokers. Until recently I’d hear the term pawnbroker and think in black-and-white: Rod Steiger living in a grim, small shop in a beat-down part of town.
But while the pawnshops of yore are still around, they now must compete with the likes of Cash America. With 650 stores scattered across the U.S., Cash America generated more than $150 million in pre-tax profits last year on $1 billion in revenues.
That was the great surprise of the two years I spent on the economic fringes, reporting on an upside down world in which people with no money in their pockets is good for business. Poverty is not just big business but grab-the-attention-of-Wall-Street huge.
Enterprises specifically catering to the poor isn’t a new phenomenon. The pawn broker dates back centuries and the first check cashers started operating in the country’s bigger cities during the 1930s. But now at least six publicly-traded companies are in the check cashing business, or seven if you include Wal-Mart, which a few years back started cashing peoples’ checks for a fee. Cash America is one of three publicly-traded companies offering pawn loans against a person’s valuables — at rates ranging between 60 percent and 300 percent interest, depending on the state in which they operate.
Rent-to-own — the business of renting people their furniture, appliances and electronics by the week or month — dates back to the 1960s. It may seem a trifling, edge business but the industry has been dominated since the late 1990s by a pair of public companies booking billions in revenues each year and hundreds of millions in profits.
The poverty industry, however, is more than a few old-line businesses going Wall Street. The real wages of those living on the bottom of the economic pyramid in the U.S. have stagnated in recent years while, meantime, the costs of most everything else, from rent to health care to heating oil has skyrocketed.
That has spelled opportunity for any number of ambitious entrepreneurs, who have invented a long list of ways in the past 25 years for peddling high-priced loan products to the working poor.
The most controversial of these new inventions is the payday loan. A payday loan is a short-term cash advance of maybe $300 or $500 against a person’s next paycheck. The payday business didn’t exist twenty years ago but today there are as many payday stores scattered across the country as there are McDonald’s and Burger Kings in the U.S.– and yet the payday chains operate in only around two-thirds of the states.
What makes the payday business so controversial is the rates they charge. The typical store charges a $15 fee for every $100 borrowed on these loans lasting typically two weeks. That works out to an annual interest rate of 391 percent.
No less than seven publicly-traded companies are in the payday business.
Another creative idea, if not one that also runs counter to public policy: the refund anticipation loan. There’s one time each year that the working poor feel rich: tax time. That’s because of the earned income tax credit, an anti-poverty program dating back to the Nixon era. If you make $15,000 or $20,000 or $30,00 a year and have kids, you’re going to receive a fat tax refund equal to two or three months’ salary.
The earned income tax credit puts an extra $40-plus billion in the pockets of the working poor each year – minus the billions they spend to have their taxes done at these instant tax mills that feast on people so desperate for instant cash that they’ll hand over hundreds of dollars in charges to save waiting the two or three weeks it takes the IRS to mail a refund.
Other relatively new entries into the pantheon of what might be called Poverty, Inc. businesses include the used auto financing business, a sector that saw any number of big players go public, or at least try to, during the 1990s, and also the subprime credit card. The subprime credit card dates back to the second half of the 1980s when some of capitalism’s more intrepid souls started mass marketing high-rate credit cards to the very customers other banks summarily rejected.
Once publications such as American Banker started reporting, in the late 1990s, that these subprime credit card lenders were posting profit rates two or three times greater than those booked by more risk-adverse lenders, was it any wonder that some big brand-name banks bulled into the business? (Capital One, Advanta, JPMorgan Chase, to name just a few.)
Add the revenues generated by those in small splinters part of Poverty, Inc., like the auto title loan (short-term loans made against a person’s car, which is legal in around one-third of the states) and the pre-paid credit card, and that adds up to around $100 billion.
That compares to the $60 billion or $70 billion the country’s casinos, Indian casinos included, generate in revenue each year. The nation’s funeral business is around a $15 billion a year industry and the country’s liquor stores and other retailers sell around $30 billion in beer, wine, and spirits each year.
Is it any wonder, then, that sometime this week the House and Senate conferees assembled to debate the final shape of a financial reform package are slated to start talking about the shape and scope of a proposed new consumer financial reform agency to monitor these businesses selling high-priced financial services to some of our country’s most vulnerable citizens?
Gary Rivlin is the author of “Broke USA: From Pawnshops to Poverty, Inc.”