Cashing In On Distress
The Expansion of Fringe Financial Institutions during the Great Recession
Jacob W. Faber (New York University)
The finance industry plays an important role in shaping inequality. Private financial institutions determine, often in partnership with government, where to invest in housing, economic development, and infrastructure. These investments are often drastically uneven, fostering job growth and housing value appreciation in some areas and economic decline in others. One manifestation of this disparity is dramatic differences in access to services. While the affluent are able to build home equity and retirement accounts via access to “mainstream” financial services, the poor are disproportionately reliant on “alternative” or “fringe” services, such as check cashing outlets (CCOs), payday lending, and subprime mortgages. This trend towards a tiered financial services system is part of a wider trend of growing inequality.
In addition to services provided to individuals, the finance industry plays an important role in inequality between places. The industry often determines, often in partnership with government, where to invest in housing, economic development, and infrastructure, which creates “winners” (i.e. neighborhoods with robust job growth and housing value appreciation) and “losers” (i.e. declining areas marred by crime and poverty). The spatial distribution of these services is also important in shaping the day-to-day experience for individuals and families. Living in a neighborhood with numerous mainstream banking options can help shape norms (e.g. through knowledge and availability) that are different from living in an area where fringe financial services are ubiquitous.
One particular type of fringe financial service, the CCO expanded dramatically in New York City during the Great Recession. By 2011, there were more CCOs in New York than either Starbucks or McDonalds. CCOs are small storefront operations where patrons can cash checks for a fee, which is typically a percentage of the check’s value. Compared to mainstream banking (e.g. a checking account), CCO fees make them more expensive on a per-transaction basis. Although CCO supporters justify the costs by pointing to the risks CCOs take, such as staying open for long hours and operating in neighborhoods with higher crime rates, policy makers, inequality scholars, and advocates for poor have been concerned about CCOs because their fees can add up to a substantial amount of money over time. A Brookings study, for example, estimated that in some states a fulltime worker could lose $40,000 over a career through the reliance on check cashing. In aggregate, fees can cost communities millions of dollars, limiting economic growth. Scholars refer to these kinds of financial penalties for living in poor neighborhoods as “poverty” or “ghetto” taxes.
Interestingly—and relevant to the stratification of space—the strongest CCO growth was experienced in neighborhoods hit hardest by the economic downturn and in communities of color. Surveys of CCO users and ethnographic research at CCOs show that many patrons deliberately choose CCOs because they lack comfort with mainstream institutions, find the penalties associated with a bank account to be onerous, and have an immediacy of need for cash—which banks often cannot provide to the poor. The Great Recession exacerbated these issues, as job losses have put more people at risk of increasingly expensive bank fees.
In many cases, the poor have to make hard choices about their banking, which are often influenced by things out of their control, such as bank fees and economic trends that affect cash flow. Moreover, CCOs are not inherently bad and the communities in which they are located would likely be worse off if they were eliminated tomorrow. Nor are banks the good actors. Together, increasing bank fees and CCO growth are creating a system that is more expensive over time, especially for poor.
The fact that fringe financial services expanded in neighborhoods hardest hit by an economic downturn caused by another fringe financial instrument (i.e. subprime mortgages) has serious implications for our understanding of segregation. This connection suggests that the financial sector is a powerful contributor to inequality between places and that these inequalities can and do compound over time, widening the opportunity gaps between neighborhoods. Furthermore, these findings contribute to our understanding of how race is lived on a day-to-day basis. Communities of color—and Black and Latino neighborhoods, in particular—are vastly different from those inhabited by White New Yorkers, which have many more banks and many fewer CCOs. The ghetto tax, therefore, does not affect us all equally.
Jacob William Faber is an Assistant Professor at New York University's Robert F. Wagner School of Public Service and a Postdoctoral Research Associate in the Department of Sociology at Princeton University. His research focuses on spatial inequality. He leverages observational and experimental methods to study the mechanisms responsible for sorting individuals across space and how the distribution of people by race and class interacts with political, social, and ecological systems to create and sustain disparities.