Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor

5. Explaining the Boom in Fringe Banking

5 Explaining the Boom in Fringe Banking The boom in pawnshops and check-cashing outlets began in the late 1970s and gathered momentum in the 1980s. I believe that one of the more important factors contributing to this growth was a marked increase in the number of households without bank accounts. These households were largely excluded from the payment and credit services of mainstream financial institutions. The increase in households without bank accounts was in turn mainly the result of a variety of socioeconomic and regulatory changes that reduced the ability of many households to save and increased the cost of maintaining deposit accounts with small balances. Other factors also contributed to the fringe banking boom, some of which affected the demand for fringe banking services and some of which affected the supply. These include an increase in households' credit risk; a reduction in unsecured, nonrevolving consumer lending by banks and small loan companies; increased immigration; an increase in gold prices; a spreading awareness among entrepreneurs of the business opportunities in fringe banking; and a growing preference among consumers for instant services. 84 Explaining the Boom in Fringe Banking 85 THE DECLINE IN THE OWNERSHIP OF DEPOSIT ACCOUNTS The most comprehensive data sources documenting the decline in the ownership of bank accounts over the 1980s are the 1977 Consumer Credit Survey and the 1989 Survey of Consumer Finances , which were conducted by the Survey Research Center at the University of Michigan with the sponsorship of the Federal Reserve Board and other government agencies. Both surveys asked about 2,500-3,000 families detailed questions about their socioeconomic characteristics, including their assets and liabilities. The families were selected to obtain nationally representative samples . In the survey, families were defined to include the head of household-normally the individual holding the title or lease on the housing unit-and all other persons living in the dwelling unit related to the head of household. Under this definition, a family might consist of a single individual. Because the two surveys treated wealthy families differently, to make the surveys comparable I examine only the responses of families with less than $83,780 in income, calculated in 1991 prices.1 This is equal to $35,000 in 1976 prices, which was a cut-off category in the 1977 survey. Since fewer than 10 percent of U.S. families in 1991 had incomes above $80,000, and certainly more than 98 percent of these families had bank accounts, the truncation of the data sets should not limit the analysis. After eliminating families with incomes above $83,780 in 1991 prices and dropping observations with missing responses, the 1977 data set contained responses from 2,025 families, and the 1989 data set contained responses from 2,091 families. Table 5.1 examines changes in the percentages of households in the surveys with bank accounts, broken down by household socioeconomic categories.2 In the table and the discussion that follows, the term "bank account" is used in its generic sense and lCaskey and Peterson (1994) has a detailed discussion of the surveys and a more complete analysis of the data and trends. 2Because the surveys attempted to obtain nationally representative samples, the percentages of households without bank accounts in the samples should reflect the percentages nationally. There are, however, several potential reasons why the correspondence may not hold exactly, including inaccurate survey responses, nonresponses to particular questions, refusals to participate in the survey, and sampling errors. 86 Fringe Banking Table 5.1 / Percentages of Households with Deposit Accounts of any Type 1977 1989 All Households 90.5 86.5* Income (in 1991 $) Up to $11,969 70.3 59.2* $11,970-$21,545 86.2 85.8 $21,546-$29,925 93.7 92.5 $29,926-$47,875 95.9 97.2 $47,876-$83,780 99.6 98.3* Age Less than 25 years 88.6 70.7* 25-64 years 91.4 85.6* 65 years and older 87.8 91.8 Education 0-8 grades 76.9 69.8* 9-11 grades 83.9 77.2* High school 94.1 85.8* Some college 97.1 94.3* College degree 99.0 98.4 Race Minority 71.6 65.8* White 93.6 93.0 SOURCE: Caskey and Peterson (1994) based on the Federal Reserve Board's 1977 and 1989 Survey of Consumer Finances. *The hypothesis that the percentage in the category...