How Wal-Mart can help the poor better than Ten Percent is Enough

The idea of monopoly is generally associated with the idea of enormous firms. And the idea of Wal-Mart is generally associated with crushing cute mom and pop firms. But oftentimes smallish incumbent firms are a kind of local monopoly, extracting rents out of a geographically delimited customer base. And Wal-Mart can be part of the solution:

Wal-Mart already has “MoneyCenters” in 1,000 of its U.S. stores, and the company said yesterday it plans to to add 400 more by the end of the year. The centers offer services like check cashing and bill pay that are often considered part of the broader “fringe banking” system. [...] Lots of those people go to local check-cashing outfits that often charge high fees. So Wal-Mart, which charges $3 to $6 cash a check, can be a good alternative, said Alejandra Lopez-Fernandini, who works for a New America Foundation program that aims to help low- and middle-income people build wealth.

If you’re cashing, for example, a $1,000 biweekly paycheck then $6 is almost one third the price MoneyGram is asking. Nothing too earth-shattering about this, but it underscores the point that a lot of the time the best solution to abusive business practices is to find ways to get competing firms into the business.

Incidentally, the Wall Street Journal notes that Wal-Mart once tried and failed to get a full bank charter which would have allowed it to accept deposits and make loans. If they had the license, how many of the 17 million Americans who currently lack a bank account would have one today? And how much damage would it have done to the business models of incumbent depositary institutions?

From Matt Yglesias, who is a left-leaning progressive, by the way.

sigh. more on usury.

As I said in the comments to Travis’ post, Rachel Anderson’s definition of a bad loan is wrong. Banks mostly lose money on bad loans – the fees and penalties simply limit the amount of losses. These are only “extra” profits if the borrower is somehow able to turn it around and eventually pay back most if not all of the principal. This doesn’t usually happen.

A much harder scenario is this: Say you are actually a scrupulous banker, but since you are a large bank, you need to provide guidelines to several hundred loan officers about how to approve a loan based on any application you want to design. How do you do it? How do you know a person will pay you back? Remember, not only do you have to give this guidance to hundreds of people, but they will themselves be dealing with hundreds of customers. Most big banks do not do “relationship banking” with individual consumers, so you can’t use that. You’ve got a paper application and perhaps an hour interview. What do you want to know?

Then, what do you tell your hundreds of loan officers to do when they are each dealing with hundreds of defaults? Mass forgiveness? If you get a reputation for that, then you’re a sucker who will attract unscrupulous borrowers (yes, those exist also). I think you may have some sort of penalty for non-payment to deter the worst borrowers from attempting fraud – it is easier to prevent the prosecute after the fact.

The false dichotomy here is one of a “good” lender who forgives debts and a “bad” lender who imposes penalties for non-payment. Yes, there are unscrupulous bankers, but I doubt they consist of a majority of employees or loan officers at big banks. Most of them are trying to deal with a very difficult scale problem. Economies of scale allow lower borrowing costs – that is why big banks exist. But to scale up, they need to deal with people in large groups based on common characteristics.

We are talking about big banks and mass lending. Scale is a big, big problem when you are talking about things like forgiving debts, fines, penalties and like. How do you tell the difference between someone who is genuinely in need versus someone telling you a story who is just trying to sucker you?

Anyone who has been approached for money on the street has faced this problem. Let’s say you could talk to the person requesting money for an hour. What would you ask to determine if they were honest or lying? Let’s say you could force them to provide documentation. What would you want to see? Then, you make the decision on the spot to “loan” them money. Now, let’s say this is your business. How will you make enough to have money to pay your mortgage?

That is why I advocate the use of local community banks – you get more context and relationship. Trying to impose context and relationship on big bank lending is a waste of time. If you want less “usury” as defined as penalties and high interest rates for risky borrowers, then let’s focus on the financial regulation legislation and see if we can get a cap on bank size to start with.

Usury, again

Rachel Anderson of the Center for Responsible Lending has a new post up at the Call & Response blog, joining the conversation started by Dan Rhodes and continued by James Howell.

The difference between a good and a bad loan is that in a good loan the lender succeeds when the borrower succeeds. The loan principal is repaid on time and with interest. In a bad loan, the lender benefits from the borrower’s misfortune, reaping extra fees through penalties, defaults, and loan rollover. In the hands of unscrupulous businesses, credit can dig a debt trap destroy households.

Read the full post here.

For the poor; against “10% is enough”

James Howell’s response to Dan’s post is up here. It’s mostly the main objection that Jesse raises, that capping interest will limit lending in a way that ultimately hurts the poor. He gets a little into the differences between the subsistence agrarian economy of Bible times and our current global market economy, but doesn’t really articulate a method for how those ancient legal codes are/aren’t binding or guiding or whatever for us now.

See previous posts here and here.

More on the 10% is Enough Campaign

Here, this time from Emmaus Way‘s own Dan Rhodes, in Duke Divinity School’s Call & Response blog. I’ll link to the rejoinder from James Howell (senior pastor of Myers Park United Methodist Church in Charlotte) once it’s up.

In some sense, the campaign is simply the attempt to reintroduce the word “usury” to our vocabularies. Some acts of lending are simply unjust and exploitative, and as Christians we condemn these usurious practices. The church never changed its mind and deemed usurious practices legitimate. Any talk of usury simply disappeared. We became at home in a world where profits are praised and returns glorified as beneficial for all, despite the fact that income disparities are now as great as they’ve ever been. It has become extremely difficult to nameany amount of interest usurious. For the church to say “10% is enough” is to claim that usury does in fact exist. We have an obligation to name it.