Some experts say traditional banks actually spurred the creation of the payday-loan industry by focusing lending efforts mostly on higher-end customers.

The way Richard Bauer sees it, he’s serving a need that the rest of the banking and finance industry doesn’t understand. And for providing the service, he and others in his business are vilified as preying on the poor and powerless of society.
“It amazes me,” he says, “that there are people out there and organizations that are doing the best they can to blackball us, when we serve their customers and constituents better than the alternatives do.”
Bauer is CEO of 1-Stop Check Cashing and Payday and Title Loans, part of the payday-loan industry, with stores located across the Valley.
His customers come for short-term loans and paycheck advances, which the company supplies for a fixed fee per transaction. In an uncertain, troubled economy, with other companies closing their doors or eyeing Washington bailout money, this is a thriving business.
By some estimates, the payday and check-cashing industry is shaping up to be one of the few success stories of these economic times. Across the country, there are more payday outlets than there are McDonald’s restaurants.
And while many transactions made by payday outlets are relatively small by traditional banking standards, the larger industry itself — including pawnshops and auto-title lenders — is making money. A Nov. 7 article in the New York Times estimates it’s a $100 billion annual venture nationally and growing.
The payday-loan industry emerged years ago when traditional banks left inner-city neighborhoods or otherwise failed to serve individuals in low-income and blue-collar areas, according to supporters of the enterprise.
Payday-loan backers say the service provides an economic lifeline to people without traditional bank accounts or other access to credit.
That includes some 28 million Americans without bank accounts and more than 50 million with no credit score. Approximately 20 percent of Latino and African-American households across the country do not use a traditional bank account, said the Times article.
“You can’t change human nature,” says Robert Gnaizda, general counsel for the Greenlining Institute, a California nonprofit addressing financial issues. “And you can’t outlaw immorality.
“The only way to get rid of payday lending is for the banking industry to aggressively seek to serve those who presently use payday loans,” he says. “They must assist low income families by providing low-cost products that do not involve unexpected fees. The banking industry has never done that.”
But critics contend payday lenders essentially rob their clients, by charging exorbitant rates for cashed checks and short-term borrowing. They refer to them as the “loan-sharks” of modern times.
In Arizona, a recent initiative seeking to make changes to the industry failed at the polls. But the controversy enveloping the industry is not likely to disappear anytime soon.
Gnaizda, whose organization supports payday lending that is regulated and evaluated, says payday lenders are more honest about their fees than traditional banks.
“Banks prey on low-income families to a greater degree than payday lenders,” he says. “Show me a financial industry that has a sign that says customers are subject to up to $300 a day in fees and fines.”
Banks, he says, thrive on bounced-check charges and overdraft fees, and credit card charges can be exorbitant, as well.
By contrast, payday lenders let their customers know up front what they’ll be paying.
In some cases, that can be 2-4 percent of a check’s value — a figure that could add up to $40,000 in fees over a customer’s life, according to a study by the Brookings Institution.
Matt Fellowes, director of the Pew Safe Banking Opportunities Project, says it becomes a concern because payday lenders tend to serve the same customers repeatedly, rather than random borrowers taking out quick cash for an emergency.
“To be successful, they need to generate repeat customers,” he says. “It’s a high-cost business model. In most cases, they’re meeting a scrupulous need in an unscrupulous manner.”
He agrees the industry grew out of a major oversight by the banks. In fact, Fellowes contends, the banking industry spurred the payday business by failing to provide small lines of credit to low-income customers, while promoting high-interest credit cards — acquiring hundreds of billions of dollars in sub-prime debt in the process.
Now, with the economy souring, the payday business is up while other arms of the financial sector are down.
“Payday lenders have been very entrepreneurial and innovative,” Fellowes says. “They took advantage of a vacuum left open by the mainstream institutions. Now, those institutions are grappling for ways to generate more revenue.”
In the future, that revenue may come from short-term loan-style ventures. Fellowes notes a number of banks across the country are experimenting with check-cashing alternatives, in order to recapture some of the market share lost to the payday business.
“There are number of efforts underway to consider how banks can successfully compete in this marketplace,” he says.
Conversely, some states have established limits on fees charged by check-cashing stores, or capped the number of stores that can operate. Also, in 2006, Congress prohibited the payday-loan industry from serving military personnel.
But Gnaizda, along with other supporters of the industry, does not believe that such practices will be entirely suspended. Instead, he says the traditional banking industry will adapt its methods in order to expand the bottom line.
“I do not believe that the payday lenders will be eliminated, whether you outlaw them or not, given the needs that they serve,” he says. “And you can’t require them to charge so little that they will not make a profit.”
Doing so would effectively drive the industry underground — a dangerous prospect for those who would continue to use the service.
“In my old neighborhood, the bookies provided payday loans,” Gnaizda says. “And if you didn’t pay, they broke your arm.”
George Dean, president and CEO of the Greater Phoenix Urban League, agrees the banks eventually will step in and revamp practices in order to acquire a taste of payday profits. “If the banks begin to address the needs of the community that goes to the payday-loan business, it’s a new market for them,” he says.
In the meantime, payday customers such as Susan Leach, a Scottsdale woman in the property management industry, will continue to frequent check-cashing outlets.
Leach admits at first, she experienced trepidation at the prospect of using a check-cashing service. “It was a tough decision,” she says. “But I needed a car repair, and I had to get to work.”
Leach estimates that she uses 1-Stop Check Cashing five-to-six times a year, and each time she is impressed with the professionalism and personal attention of the staff.
“They are fabulous,” she says. “I make good money — I’m in a management position. But in this economy, check-cashing fees are better than a bounced check.
“Maybe two years ago I would have been a snob and too good to use a check-cashing bu
siness,” Leach says. “But they’ve been great to me. They saved me.”