The process of financial deregulation that began in the late 1970's and made banking and commerce more competitive has profoundly changed the way we invest, bank and purchase products. The downsizing of government during the Reagan revolution added to the process, shifting the responsibility for deciding who wins and who loses onto the market, reasoning that it and its 'invisible hand' were best able to allocate resources. Commerce flourished. New and innovative financial products and services were created to fill in the void left by government and the increased emphasis on the market. Financial news networks on cable TV bombarded us 24-7 with financial information and stock recommendations. Many of us became first-time investors, dabbled in the stock market or bought mutual funds and tried electronic banking. But for those on the other side of the financial tracks – the poor and lower-to-middle classes – this same period brought on a kind of bank run in reverse. Traditional banks fled for more affluent neighborhoods; check-cashing businesses moved in.

Private Banking for the Poor: "The rate schedule--posted above the checkout line for beer and liquor--notes that it costs $1.65 to cash a check up to $200, but offers 50 cents off if you buy $5 worth of liquor." Pg 57 Merchants of Misery

Deregulation and financial modernization left wide open a door inviting these loosely regulated (if at all) fringe banking businesses. It is called Fringe banking or the subprime market (subprime because it is of lower credit quality) and includes such things as predatory lending, payday loans, auto title loans, check cashing, rent-to-own and pawnshops (See Exhibit below).

They provided basic financial services - but at exorbitant prices. Innovation in these cases didn’t mean devising ways to get more information into the hands of consumers, but to get more consumer dollars into the hands of the innovators. Providers found ways to circumvent state usury laws by tacking on special charges that are not used in computing the interest they are charged. The growth of such fringe banks has been staggering. According to the U. S. Treasury Department 1 (Footnotes) the number of businesses that "classify their primary line of business (10,000) as the money transfer services" were greater than the number of banks in the USA. Further, according to the Treasury 2 (Footnotes) there are 'over 40,000 additional stores that offer money services as an ancillary service" in the USA. Given that there are more money service businesses in the USA than there are banks you would think that the Federal Reserve or some other national governmental organization would be interested in monitoring and supervising this industry. Alas, such is not the case. Our financial overseers turned a blind eye; years later, we awake from sleep to find that we have created a two tiered financial system of haves and have-nots, reminiscent in spirit of the Jim Crow era. Segregation created a market for separate (and often substandard while more expensive) services for Blacks; the current economic situation has created a market for substandard and expensive financial services for the poor. Enter the phenomenon known as "predatory lending." As Michael Hudson notes in Merchants of Misery: How Corporate America Profits From Poverty, (Common courage Press, 1996:

"The poverty industry is made up of an array of businesses: pawnshops, check-cashing outlets, rent-to-own stores, finance companies, used-car dealers, high-interest mortgage lenders, trade schools for the poor and uneducated. It's growing in size and taking in dollars at a dizzying pace by targeting people at on the bottom third of the economic ladder--perhaps 60 million customers who are virtually shut out by banks and other conventional merchants." (p.1)

Most of these customers are disproportionately minorities or elderly 3)(Footnotes). Study after study shows that predatory lending and other aspects of fringe banking are in fact if not intention, prejudicial. It is time we the people asked ourselves why they are allowed not only to continue and to flourish, but to exist at all.

As Robert Manning notes in Credit Card Nation: The Consequences of America's Addiction to Credit , (Basic Books, 2000) the focus of government under deregulation has shifted:

"Today, the political climate regarding supervision of the banking industry has changed dramatically, even after the S & L fiasco of the 1980's and the Microsoft antitrust trial of the late 1990's. The U. S. government's objective has shifted from restricting bank activities (protecting consumer deposits from risky investment schemes) to actively promoting deregulatory policies that facilitates the creation of financial conglomerates." (Page 196)

Lacking a basic banking services such as a checking or savings account creates myriad problems, from making it difficult to save, nearly impossible to establishing credit and continually leaving the consumer open to increased costs 4)(Footnotes). A whole class of Americans have been relegated to the back of the bus, abandoned in the sense that they are not able to participate in our new financial world order. As John Caskey writes, Fringe Banking: Check Cashing Outlets, Pawnshops and the Poor, Russel Sage Foundation, 1994:

" [T]he 1980's boom in fringe banking and the increased segmentation of consumer financial markets reflected the increasing polarization in the economic well-being of American families. The incomes of millions of households at the lower end of the income distribution fell or stagnated." (Page 7)

It gets worse. The people who are polarized at the bottom end of the economy will remain there. With no place to hold their money in safekeeping, they cannot accumulate wealth. Higher costs eat into the little they are able to earn. They are trapped in a seemingly endless cycle of working hard to earn little, and paying more to receive less. Millions of them. Professor Ed Wolff of NYU ('Recent Trends in Wealth Ownership', Revised April 2000) found that 40% of Americans saw their net worth decline between 1983 to 1998 in what has by many been called the greatest bull market in the history of the stock market. How did we allow ourselves to come this far from the mark of equality and justice, freedom and prosperity for all?

Tracing the Roots of Fringe Banking: The legalisation of loan-sharking

As deregulation was gathering momentum in the 1980's, the banking industry underwent a radical transformation. Consolidation, mergers, new opportunities and the S + L crisis all drastically altered the banking business. There was a dramatic reduction in the number of banks in general and, as the focus shifted onto profitability, there was also a reduction in the number banks in inner cities and poorer neighborhoods. By the 1990's, -the exodus became a stampede, leaving many poorer neighborhoods underbanked. As Hudson notes (Merchants of Misery);

"Banks create a vacuum by closing branches and refusing loans in disadvantaged neighborhoods. Into the void come check cashing cashers, high-rate mortgage companies and others eager to serve the bankless'.Page 17 5)(Footnotes)

Traditional banks have caught on to the advantages of fringe banking. In an "if we can't beat'em, join 'em" spirit, there has been a movement by major banks to hook up with operations unencumbered by rules and regulations 6)(Footnotes). Among the rules thus circumvented are state usury laws and legislation such as the Community Reinvestment Act of 1977 - legislation enacted to prevent redlining by banks 7)(Footnotes).

In other words the providers of fringe banking services are able to circumvent laws designed to protect consumers with various gimmicks 8) (Footnotes) . Left with no choices, the un-banked are forced to deal with the legal equivalent of loan sharks. Many would not qualify for traditional banking services in any case; and, to be fair, some analysts believe others would opt for the services provided by fringe bankers as a matter of choice rather than coercion. Caskey in Fringe Banking 9)(Footnotes): points out several reasons why fringe banking services are used. But it boils down to this: (a) the fees for traditional accounts with small balances increased during the 1980's, (b) the exclusion from major credit markets of newly unemployed or marginally employed individuals - all poor credit risks - plus an overall erosion of the financial safety nets for many households, made pawnshops and the like increasingly attractive as sources of quick money for consumers eager to spend.

Even with these drawbacks, however, traditional banks were not necessarily a non-option, providing the people could find a nearby branch. The Fannie Mae Foundation, which has worked with first-time home buyers, lower income families and others basically in marginal financial situations, found that between 30% to 50% of the users of fringe banking services actually would have qualified for traditional banking services ("Financial Services in Distressed Communities: Issues and Answers", James H. Carr and Jenny Scheuetz, Fannie Mae Foundation, 2001). The prospect of financial stability they offered, however, may not have seemed worthwhile stacked up next to the inconvenience (and possibly fear) of traveling outside the neighborhood, the payment of higher maintenance(?)fees for small accounts, and restrictions on withdrawals. The local check-cashing operation just around the block appears to be a much simpler way to put cash in the hands of the consumer, and to put it there quickly.

For its part, the Fringe banking industry argues that higher costs are justified given the increased risk or credit unworthiness (noted by Caskey) of its clientele. Adding to the costs are the small transaction size and labor intensive nature of the business. For example, pawn-broking loans are often less than $100 and require the pawnbroker to appraise as well as document the transaction--all of which take time and effort. what about insurance for companies in high risk neighborhoods - they must factor that in, too, yes? Advocates of fringe banking also point out that fringe services can mean the difference between making it or going bust.who? the client or the business owner? And that their clients have unique needs or require small loans that cannot be met by traditional banks.

Martin Mayer in The Fed: The Inside Story of How The World's Most Powerful Financial Institution Drives the Markets hits the nail on the head:

"The truth is that after a generation of expanded retail banking services, the United States has been moving back toward the old days when people who didn't have much money would be served by high-margin cheapjacks who got their funds from banks that had no reluctance to accept their share of dirty money. The Fed's untroubled supercilious tolerance of these developments reminds us that there are people in high places who still believe government should not interfere with the freedom of contract between the loan shark and the needy." Page 298