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November 9, 2008

You mean the poor are rational?

The NY Times has a fascinating and fair discussion of payday lending and check cashing to the poor.

The first thing you notice when you walk in the door at Nix is a list of products, services and prices, a bit like a fast-food menu. Some of the prices are quite high, but the charges are neither confusing nor deceptive. “They’re going to charge you $13, is that O.K.?” a cashier — young, Latina, long blond hair, long pink nails — asked as a bulky, middle-aged guy handed over a stack of cash to send via Moneygram.

Even the payday loans are transparent. “Your max is $150, so make it out for $172.50,” the cashier Joseph told a stocky black woman in a baseball cap, standing at the counter with an open checkbook. (Unlike check-cashing customers, payday borrowers are by necessity bank customers — they have to write a postdated check to get a loan.) The woman was paying a lot — $22.50 to borrow $150 for just two weeks. But there were no surprises, no hidden fees.

Compare that with what a lot of banks do. Bank of America took heat earlier this year for more than doubling the interest rate on some credit-card accounts, even if the cardholder pays every bill on time. Banks, meanwhile, have nearly quadrupled their fee income in the last decade, according to the F.D.I.C., while credit-card late charges and over-limit charges have nearly tripled. Fees imposed on customers for temporarily overdrawing their accounts — by accident or on purpose — have been particularly lucrative; banks made $25.3 billion in 2006 on overdraft-related fees, up 48 percent in two years, according to the Center for Responsible Lending. On the Web site of Strunk and Associates, a big seller of overdraft programs, bank and credit-union executives offer glowing testimonials. “Strunk’s program has exceeded expectations,” one writes. “We have generated a 100 percent increase in overdraft revenue.”

This libertarian is unsurprised that poor people make rational decisions about their financial lives. Like the rest of us, they make financial mistakes, appreciate being respected, and enjoy a transparent fee structure. However, because they are more credit constrained than richer people, they bump into situations more frequently where they pay arcane and high banking fees and feel like they are treated disrespectfully by banking staff. As such, there choices seem reasonable. If we were in their shoes we could very well make the same decisions.

Posted by OneEyedMan at November 9, 2008 4:45 PM

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