Fringe Banking

Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor

John P. Caskey
Copyright Date: 1994
Published by: Russell Sage Foundation
Pages: 184
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  • Book Info
    Fringe Banking
    Book Description:

    In today's world of electronic cash transfers, automated teller machines, and credit cards, the image of the musty, junk-laden pawnshop seems a relic of the past. But it is not. The 1980s witnessed a tremendous boom in pawnbroking. There are now more pawnshops than ever before in U.S. history, and they are found not only in large cities but in towns and suburbs throughout the nation. As John Caskey demonstrates in Fringe Banking, the increased public patronage of both pawnshops and commercial check-cashing outlets signals the growing number of American households now living on a cash-only basis, with no connection to any mainstream credit facilities or banking services. Fringe Banking is the first comprehensive study of pawnshops and check-cashing outlets, profiling their operations, customers, and recent growth from family-owned shops to such successful outlet chains as Cash American and ACE America's Cash Express. It explains why, despite interest rates and fees substantially higher than those of banks, their use has so dramatically increased. According to Caskey, declining family earnings, changing family structures, a growing immigrant population, and lack of household budgeting skills has greatly reduced the demand for bank deposit services among millions of Americans. In addition, banks responded to 1980s regulatory changes by increasing fees on deposit accounts with small balances and closing branches in many poor urban areas. These factors combined to leave many low- and moderate-income families without access to checking privileges, credit services, and bank loans. Pawnshops and check-cashing outlets provide such families with essential financial services thay cannot obtain elsewhere. Caskey notes that fringe banks, particularly check-cashing outlets, are also utilized by families who could participate in the formal banking system, but are willing to pay more for convenience and quick access to cash. Caskey argues that, contrary to their historical reputation as predators milking the poor and desperate, pawnshops and check-cashing outlets play a key financial role for disadvantaged groups. Citing the inconsistent and often unenforced state laws currently governing the industry, Fringe Banking challenges policy makers to design regulations that will allow fringe banks to remain profitable without exploiting the customers who depend on them.

    eISBN: 978-1-61044-113-1
    Subjects: Economics, Sociology, Political Science

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. List of Tables and Figures
    (pp. ix-x)
  4. Preface and Acknowledgments
    (pp. xi-xiv)
  5. Why Study Fringe Banks?
    (pp. 1-4)

    The United States financial system is undergoing a transformation. Many of the changes—the erosion of regulatory barriers between banks and securities firms or the rise in interstate banking—have been widely noted and discussed. But one important development has crept in, almost completely unobserved—a rapid, nationwide expansion in the number of pawnshops and commercial check-cashing outlets. These so-called fringe banks provide credit and payment services primarily to low- and moderate-income households, many of which rarely interact with the formal banking system.

    Despite the sparse attention that fringe banks receive, they are a significant part of the financial system,...

  6. 1 Four Themes
    (pp. 5-11)

    The following chapters investigate in depth how pawnshops and CCOs function, who uses these institutions, and for what reasons. They also discuss the factors behind the recent rapid growth in fringe banking and examine the case for regulating pawnshops and CCOs. This initial chapter, however, steps back from the details and sets out the four major themes that emerge in the book.

    The first theme is that households without financial savings must often pay more than other households for basic financial services. This observation includes financial markets in a pattern that has long been recognized in markets for nonfinancial goods...

  7. 2 A Brief History of Pawnbroking and Commercial Check Cashing
    (pp. 12-35)

    A pawnshop loan is a relatively simple transaction: the broker makes a fixed term loan to a consumer who leaves collateral in the possession of the broker. If the customer repays the loan and all required fees, the broker returns the collateral to the customer. If the customer does not repay the loan by a specified date, the collateral becomes the property of the broker and the customer’s debt is extinguished. Because pawnshop loans are simple transactions, pawnshops are ancient financial institutions with a rich cultural and economic history.

    Check-cashing outlets also provide a simple service. A customer endorses a...

  8. 3 Contemporary Fringe Banking
    (pp. 36-67)

    From 1930 through the mid-1970s, the pawnbroking industry contracted. Over this same period, the check-cashing industry grew, but remained largely confined to Chicago, New York City, and a small number of other urban areas. Beginning in the mid-1970s, however, these fringe banking industries grew explosively. In absolute numbers, or measured on a per capita basis, there are more pawnshops today than at any time in the history of the United States. Florida and Texas each have more than 1,000 pawnshops, which combined make more than an estimated ten million loans annually. Over the 1980s, check-cashing outlets opened in cities all...

  9. 4 Who Uses Fringe Banks and Why?
    (pp. 68-83)

    Borrowing from a pawnshop is much more expensive than borrowing from a bank, finance company, or drawing on the line of credit provided with a bank credit card. It is also generally less convenient because the customer must carry his or her collateral into the shop and leave it in the possession of the broker. Similarly, obtaining payment services from a check-cashing outlet is substantially more expensive than obtaining these services through a bank. These observations immediately raise the question: Who uses these fringe banks and why do they choose to do so? This chapter offers answers to these questions....

  10. 5 Explaining the Boom in Fringe Banking
    (pp. 84-110)

    The boom in pawnshops and check-cashing outlets began in the late 1970s and gathered momentum in the 1980s. I believe that one of the more important factors contributing to this growth was a marked increase in the number of households without bank accounts. These households were largely excluded from the payment and credit services of mainstream financial institutions. The increase in households without bank accounts was in turn mainly the result of a variety of socioeconomic and regulatory changes that reduced the ability of many households to save and increased the cost of maintaining deposit accounts with small balances.


  11. 6 Regulating Fringe Banks
    (pp. 111-127)

    Pawnshop loans and CCO payment services are far more expensive than are credit or payment services from mainstream financial institutions. Yet millions of low- and moderate-income households rely on these fringe banks for basic financial services, and the number is growing. This raises the questions: Should a ceiling be placed on the fees that fringe banks can charge? How should fringe banks be regulated? Before addressing these questions, it is important to understand why fringe banking fees are so high.

    When many people hear of the comparatively high fees levied by fringe banks, they assume that the owners of fringe...

  12. 7 Policies To Make Deposit Accounts More Accessible
    (pp. 128-138)

    Recognizing that a significant and growing number of households depend on pawnshops and check-cashing outlets for basic financial services, the previous chapter proposed some regulatory measures to protect fringe banking customers from potential abuse. This chapter examines policy proposals aimed at improving the financial and physical accessibility of deposit accounts for lower-income households. Such policies could complement efforts to improve the regulation of fringe banks and to increase the financial savings of the poor.

    Most such proposals impose costs on banks. Some bankers have complained that it is unfair to require banks to serve perceived public interests when other retail...

  13. Concluding Comments
    (pp. 139-150)

    Over the 1980s, the number of pawnshops and check-cashing outlets nationwide more than doubled. In the first section of this chapter, I argue that this growth is likely to continue into the 1990s, albeit at a slower pace. I also consider the possibility that banks might enter the fringe banking market. In the second section, I discuss some economic and social implications of the growing segmentation of consumer financial markets. In the context of this discussion, I return to the four themes set out in the first chapter.

    Pawnbroking may have reached a saturation point in several southern states, but...

  14. Bibliography
    (pp. 151-156)
  15. Index
    (pp. 157-170)