The NYT rehabilitates the payday lender

The New York Times Magazine has a fascinating and uncharacteristically libertarian feature called "Check Cashing, Redeemed" – pretty self-explanatory. In it, Douglas McGray traces the history of Nix Check Cashing – a "ghettoized" bank that's become the biggest in Southern California. "Ghettoized financial services," as one expert calls it, is an $11 billion industry in America. Through the story of Nix, the author discovers that the appeal of check cashing is the simplicity of the transactions. Traditional banks are seen as tricky and unreliable:

But he pays a fee to cash his paychecks. Then he pays even more to send a Moneygram to his wife. There’s a bank, just down the street, that could do those things free. I asked him why he didn’t take his business there.

“Oh, man, I won’t work with them no more,” Enriquez explained. “They’re not truthful.”

Two years ago, Enriquez opened his first bank account. “I said I wanted to start a savings account,” he said. He thought the account was free, until he got his first statement. “They were charging me for checks!” he said, still upset about it. “I didn’t want checks. They’re always charging you fees. For a while, I didn’t use the bank at all, they charged like $100 in fees.” Even studying his monthly statements, he couldn’t always figure out why they charged what they charged. Nix is almost certainly more expensive, but it’s also more predictable and transparent, and that was a big deal to Enriquez.

Marlo Lopez had no broad gripe with banks, but his experience was similar. He moved to the United States from Peru a couple of years ago (with a visa) and got a job as a mechanic at a food-processing plant. Lopez opened his first bank account last summer. A couple of months later, out for dinner, he overdrew his account by 18 cents and got hit with a $35 penalty. It was his fault, he said; he thought he had more in the account than he did. Still, losing that money all at once unsettled him. He kept the account but returned to cashing his checks at Nix.

Check cashers benefit from their smaller scale and lack of bureaucracy that keeps banks from adapting to the needs of the poor:

Nix’s cashiers also try to never say no. Take photo identification. A lot of customers don’t have a driver’s license. Nix stores have accepted high-school yearbooks. They’ve been known to cash a McDonald’s paycheck if someone comes in wearing a McDonald’s uniform. They even have a phone in the lobby, so a cashier can call a customer’s job site and then patch the customer in, listen to him talk to his supervisor and decide if they sound like a legitimate boss and employee. Nix says he loses as much as 5 percent of his check-cashing revenue on bad checks, but it’s worth it, he says, to be known as a place that says yes.

And at least some of the customers use the high-interest loans in financially sound ways, in order to avoid even higher fees for nonpayment of debts. Nix explains why he went from check cashing to the more villified payday lending:

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 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. “When it starts to get used like a payday loan, it’s worse.”

The spread of Nix has challenged payday lenders, check cashers, credit unions, and other "ghettoized finance" outlets to lower their rates, and seems to have energized the industry:

Kinecta’s executives decided to keep the payday loan and change the terms. Starting with three stores in the spring, and eventually across the entire chain, Nix is increasing the maximum loan from $255 to $400. They are dropping the fee from 18 percent ($45 for a two-week $255 loan) to 15 percent ($60 for a two-week $400 loan). And they will rebate a third more ($20, in the case of a $400 loan) into a savings account, after six months, if you pay your loans back and don’t bounce any checks. People get payday loans because they have no savings, Lagomarsino explained. After six months, heavy payday borrowers will accumulate a small balance. Enough, she and Nix say they hope, to convince them they can afford to save more. Later, they say, they intend to drop fees further for borrowers who always pay back on time.

Once Kinecta finishes rolling out its new payday loans, Lagomarsino has promised to open Nix’s books to outside researchers and publish data on its profits and losses. In the meantime, Kinecta will be under enormous scrutiny. “Some people said, ‘Why does it have to be so visible?’ ” Lagomarsino told me, and laughed. “One or two branches wouldn’t make a difference. This is the beauty of buying Nix. They were the largest alternative financial-services company in Southern California. If they change their fee structure, everyone has to change.”

The Wikipedia article has an interesting comparison of payday loans to different forms of late payment fees.