2
Why the Fringe Economy Is Growing

The almost exponential growth of the fringe economy during the mid-1990s was baffling, especially since real incomes were rising and the numbers of people in poverty were dropping. Nonetheless, many factors came together to foster the phenomenal growth of the fringe economy, including the rise in numbers of America’s working poor, welfare reform, high levels of immigration, the growth of the Internet, the increased financial stress that slow wage growth and the rising cost of necessities placed on the middle class; and liberal federal banking laws. In simple terms, a major reason for the growth in the fringe economy is that 43% of Americans annually spend more than they earn. A full appreciation of the growth of the fringe economy begins with an understanding of its customer base.18

Fringe Economy Customers

The fringe economy primarily targets those who make less than the median family income of $50,000 and live from paycheck to paycheck. A second target is immigrants who have little experience with banking institutions in their home countries, or who come from countries where banks cater primarily to the wealthy. Each month the amount of money they earn is equivalent to, or less than, their living expenses for rent, utilities, food, clothing, and other necessities.

According to the Consumer Federation of America, about 53% of us live from paycheck to paycheck, at least some of the time. Moreover, about 40% of all white children and 73% of all African American children in the United States live in a household with zero or negative net worth.¹ For these people, living on the economic edge means that there is no room for error. Any unforeseen expense, such as a car breakdown, a babysitter not showing up, or a bout of the flu, can become a cash crisis and lead to a trip to the pawnshop or payday lender. The traditional banking model doesn’t work for many of these people. Having poor or no credit history makes them a high risk to banks, and minimum-balance requirements and high overdraft and check-bouncing fees often make a checking account unrealistic. The lack of a nearby branch or multilingual tellers, as well as limited hours of operation, further alienates some people from traditional banking services. Many banks also fail to adequately explain the banking system to immigrants from countries where banking is limited to the upper classes.19

An important group of fringe economy customers is the “unbanked”—individuals or families without accounts at deposit institutions. Because the unbanked have no formal ties to mainstream financial institutions, they can’t secure traditional credit, so they turn to the fringe sector for check cashing, bill paying, short-term payroll loans, furniture and appliance rentals, and a host of other financial services involving high fees and interest rates. When the unbanked are combined with the similarly large number of people who are classified as “underbanked”—those who don’t utilize or qualify for bank services beyond maintaining an account—the market for fringe services is even larger.

According to the U.S. General Accounting Office, as many as 56 million adult Americans—about 28% of all adults—don’t have a bank account. Almost 12 million U.S. households (one-fourth of all low-income families) have no relationship with a bank, savings institution, credit union, or other mainstream financial-services provider.² Most of the unbanked say they lack a checking account because (1) they don’t write enough checks to warrant one, (2) they don’t have any month-to-month savings to deposit, (3) they can’t afford high bank fees, (4) they can’t meet minimum bank balance requirements, (5) they want to keep their financial records private, and (6) they are uncomfortable dealing with banks. Almost 85% of the unbanked have yearly incomes below $25,000.³ Many also have jobs for which they are paid weekly by check or cash rather than through direct deposit.

One industry-funded study found that the average payday customer was female with children living at home, was between 24 and 44, earned less than $40,000 a year, was a high school graduate, was a renter (most had lived in their homes for less than five years), and had little job tenure.⁴ This group represents the lower- and moderate-income working class rather than the poorest of the poor. However, if the fringe economy is broadly defined to include consumers with higher incomes but no assets and high debt—the functionally poor—these customer characteristics dramatically change.

The Working Poor

The Danforths live in a small three-bedroom apartment in Chicago along with their three children. Robert works in the sporting goods department at Wal-Mart, America’s largest private employer. (In 2004 Wal-Mart employed 1.2 million people and reported $250 billion in revenues, or about 2% of the nation’s gross domestic product. By 2007 Wal-Mart is expected to control 35% of all U.S. food and drug sales.⁵)

Despite having the title of “associate,” Robert earns $9.75 an hour (11 cents more than the average Wal-Mart wage of $9.64), substantially less than when he owned his own small sporting goods store. Surrounded by big box stores like Wal-Mart and Target, Robert couldn’t compete and was forced to close down. The prospects for him to get ahead at Wal-Mart are limited, since the average store has one manager, one to three assistant managers, 15 department heads, and 300–350 “associates.” On the other hand, he is one of the lucky few who have a 40-hour workweek, as opposed to the average 32-hour workweek for most Wal-Mart employees.⁶

Robert is one of 47% of Wal-Mart employees who receive health care benefits. Therefore, his modest salary is eroded by large employee premiums and high deductibles—employee-paid premiums cover 42% of Wal-Mart’s health plan, compared with the national average of 16%. In a worst-case scenario, Robert could spend about $6,400 before he sees a single benefit from the health plan. There are no free lunches, and one way or another, we all pay the real costs for Wal-Mart’s “low prices.” According to a study by the Institute for Labor and Employment at the University of California, Berkeley, California taxpayers subsidize $20.5 million worth of medical care for Wal-Mart employees. In fact, Wal-Mart personnel offices know that their employees can’t afford the company health plan and encourage them to apply for charitable and public assistance.⁷

Unlike Robert, Betsy hasn’t been able to find a full-time job and shuttles between part-time jobs at Target and Circuit City. Together, they scrape up a yearly income of $38,000, or $16,000 above the 2004 federal poverty line of $22,000 for a family of five. Despite their being above the poverty line, the Danforths’ economic life is bleak. Rent is rising, along with the costs of utilities, gas, food, pharmaceuticals, and most other necessities. Their car is getting old, and they hope to send at least one of their children to college. The Danforths are America’s working poor. They’re also the propellant for America’s fringe economy.21

Almost one in four American workers lives in poverty or close to it. Thirty-five million people work full time but still don’t make an adequate living. These workers are the nursing home aides, poultry processors, pharmacy assistants, child-care workers, data-entry keyers, janitors, and other employees of the secondary and tertiary labor markets. They are also the 53% of underemployed Wal-Mart employees with no benefits and a 32-hour workweek. As David Shipler writes, “The term by which they are usually described, ‘working poor,’ should be an oxymoron. Nobody who works hard should be poor in America.”⁸ Since the 1980s, the relative wages of these workers have declined.⁹

The growth of the fringe economy parallels the economic development of the 1990s and early 2000s. Specifically, during this time there were four distinct economic phases: a downward spiral from 1989 to 1993 (family income fell $1,572 from 1989 to 1992); a slow recovery up to 1995; rapid growth from 1995 to 2001 (family income grew $4,555 from 1995 to 1999); and another economic dip, starting in 2001.

One measure of the economic well-being of workers is the median hourly wage of male and female workers. The median male wage fell dramatically from the 1980s to the early 1990s, dropping 9.1%. While it rose 5.5% from 1995 to 1999, this was not enough to offset earlier declines. In contrast, the median female wage grew slowly over the 1980s, rising 5.7% from 1979 to 1989 and then dipping slightly in the early 1990s. Although there was a marked increase in wages during the mid-1990s, much of this increase was offset by the wage declines in the 1980s and early 1990s and by the higher prices of necessities such as housing, health care, education, and pharmaceuticals.¹⁰ While corporate profits rose in 2003, median- and below-median-wage earners were losing ground as they had in the 1980s and early 1990s, and by 2003 the gains of the mid-1990s had all but evaporated.¹¹

The problems of the working poor have been worsened by the inadequacy of the $5.15 minimum wage, which has been frozen since 1997. In 1999 about 3.3 million hourly workers (4.6% of the workforce) earned the minimum wage.¹² Among full-time workers age 16–24 that number was 10.2%, and among part-time workers it was almost 12%.¹³ In 1997 the minimum wage brought a three-person family to only within 77% of the poverty line; by 2003 the figure had gone down to 67%.¹⁴ Although the minimum wage only impacts a small portion of the workforce, it is used widely as a benchmark for setting wages in the secondary labor market.22

The Economic Policy Institute estimates that households with one adult and two children require $14 an hour—far more than the current $5.15 minimum wage—to live barely above the poverty line. Sixty percent of American workers earn less than $14 an hour, and unskilled entry-level workers in many service occupations earn $7 an hour or less.¹⁵ The working poor are also more vulnerable to the vicissitudes of life than the middle class. For example, more than 40 million Americans lack health insurance, and unanticipated events such as illnesses or family emergencies may require workers to take off time without pay, leading to a temporary shortfall in income and increased debt. Given the low incomes of the working poor, it’s not surprising that a fringe economy that promises quick cash with few questions asked has become a high-growth sector. The growth of the fringe economy can also be partially attributed to the 1996 welfare-reform legislation signed by former president Bill Clinton.

Welfare Reform

Lavelle Brown, of Milwaukee, Wisconsin, is the mother of two children and a former Temporary Aid to Needy Families (TANF) recipient. In 1997 Wisconsin adopted the Wisconsin Works, or W-2, program, which is based on a “work-first” approach emphasizing the placement of recipients in unsubsidized employment or community-service jobs rather than education and training. Under W-2 there’s no entitlement to income assistance; its goals are to promote self-sufficiency and to reduce welfare rolls. In 1997 Lavelle was forced to forgo public assistance for Wisconsin Works.

After cycling through three jobs since 1997, Lavelle finally ended up working as a certified nurse’s aide. Although she started at $6 an hour, she is now making $7.75 an hour. In the past, Lavelle was able to supplement her income by working overtime, but in the last two years her employer virtually eliminated that possibility due to cutbacks. As a seasoned welfare recipient, Lavelle knew the ropes. Her low salary qualified her for food stamps, the Child Health Insurance Program (CHIPS), the Earned Income Tax Credit (EITC), and the Child Tax Credit (CTC). By combining benefits and occasional outside work, Lavelle raised her $15,000 salary to an income of $25,000 a year. Despite this, it was often too low to meet monthly expenses, especially when an unexpected crisis occurred. Without the public-assistance safety net to help her through the hard times, Lavelle was forced to turn to payday lenders and pawnshops.23

In 1996 Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), which included the TANF program. Among other things, TANF mandated a five-year lifetime cap on public assistance, which states were permitted to reduce to two years. The soul of TANF lay in the compulsory work program that required states to place 50% of recipients in jobs by 2000. Since PRWORA’s passage, welfare caseloads have dropped more than 47% nationally. From 1994 to 2002, caseloads dropped from 14 million to 5 million, with most of the 9 million former recipients ending up in the low-wage labor market. At the same time, requests for emergency food assistance surged 17% from 1996 to 2001—62% of those requests came from families with children and 32% from employed adults.¹⁶

According to the National Conference of State Legislatures, “Most of the jobs former recipients take pay between $5.50 and $7.00 per hour, higher than the minimum wage but not enough to raise a family out of poverty. Most jobs are in the services and retail trade. So far, few families who leave welfare have been able to escape poverty¹⁷ This finding is corroborated by other reports showing the following:

• Women leaving welfare earn an average of $6.75 an hour, barely enough to raise a family of three above the federal poverty line. Fifty-eight percent of employed former recipients have an income below the poverty line, and more than half are unable to pay rent, purchase food, afford medical care, or pay for utilities.
• Only former recipients with at least a two-year post-secondary or vocational degree are likely to escape poverty by earnings alone.¹⁸

Forced into low-wage employment, former welfare recipients are an important base for the fringe economy. Indeed, it’s no coincidence that 60% of payday lending customers are women.¹⁹24

Providing for the needs of the poor is like the game of hot potatoes. Government discharges the responsibility for the poor to the labor market through compulsory TANF work requirements, while the private sector employs them in low-wage jobs without benefits. The hot potato is then passed back to government, which institutes the benefit portions of labor-force participation—CHIPS for children; Medicaid; and EITC and CTC, for supplementing low wages. In the end, taxpayers continue to subsidize the poor, indirectly. In that sense, the major beneficiaries of welfare reform are not the poor or American taxpayers, but low-wage employers who can hire cheap hourly workers without the responsibility of providing anything beyond a weekly paycheck. In large measure, this represents the adoption of Third World labor standards into the American context.

Apart from the cash offered by tax programs like EITC and CTC, government is increasingly refusing to provide emergency assistance to the working poor. While TANF work requirements force former recipients into low-wage work, they also allow fringe economy businesses to assume some welfare-state functions, such as providing emergency cash assistance through payday loans, pawns, and other short-term credit. Hence, the fringe economy has taken on the functions of a privatized—and expensive—welfare state by offering former recipients emergency financial services no longer provided by the government. It’s also one of the only economic sectors that primarily serve the poor.

Immigration

The Census Bureau projects that in less than 50 years the U.S. population will swell from 290 million to 400 million because of immigration. In 2002, 33.1 million people in the United States were foreign-born, or about 11.5% of the population. About 11.4 million of them had permanent resident status, and another 8 million were eligible to be naturalized.²⁰ Immigrants filled 4 of every 10 job openings in the mid-1990s when the unemployment rate hit record lows. In fact, when the labor force grew by 16.7 million workers in the 1990s, 6.4 million of them were foreign-born.²¹25

The 1990s saw large-scale geographic dispersion among newly arriving immigrants. While in earlier years most new immigrants clustered in a few large cities, such as Los Angeles, New York, and Chicago, the 1990s witnessed a spread to the Midwest, New England, and the mid- and South Atlantic regions. In some parts of the country, almost the entire labor-force growth between 1996 and 2000 was due to immigration.²²

New immigrants commonly fill low-skill, blue-collar jobs, since a large number have less than a high school education. About 33% of immigrants have not finished high school, compared with 13% of natives. Not only do immigrants possess fewer educational skills than native workers, but also many of their skills don’t translate into the American workplace.²³

Between 2000 and 2002, about 3.3 million illegal immigrants entered in the United States. Mexicans made up 57% of undocumented workers, with another 23% coming from other Latin American countries.²⁴ A significant portion of Hispanic poverty is attributable to these large numbers of illegal workers entering the United States and the low-paying jobs they occupy.

Although there is no reliable data about the number of immigrants who use the fringe economy, it is undoubtedly high. The 1996 welfare-reform bill had profound implications for both legal and illegal immigrants. Specifically, the bill disentitled most legal immigrants (including many who had lived in the United States for years but chose not to become citizens) from food stamps, TANF, and Supplemental Security Income (SSI).²⁵ The low wages paid to many immigrants, especially those from Latin America, the Caribbean, and Africa, put them squarely in the ranks of the working poor. Denied public-assistance benefits and other welfare subsidies, immigrants are the perfect customers for the fringe economy. This base is further expanded by immigrants who lack a basic knowledge of consumer financial services due to the lack of these services in their home countries.

Another reason why immigrants—especially undocumented workers—use fringe financial services is that they lack the requisite IDs (such as a Social Security card or driver’s license) that many mainstream banks require for credit or other financial transactions. Instead, many Mexican immigrants have a matricula consular card, a photo ID issued by Mexican consulates. While in the past only fringe businesses recognized these cards as valid identification, today some banks and credit unions, including Bank of America, Wells Fargo, and Citigroup, accept consular cards. However, many illegal workers continue to steer clear of mainstream financial institutions for fear of being caught or exposed.26

The Internet

The Internet is shaping our society in myriad ways, and its use is leaching down to America’s poorest citizens. For example, computer and Internet use has risen dramatically among all racial and socioeconomic groups since 1994. Even in low-income central cities, 51% of residents now own a personal computer and 46% have online access.²⁶ The widespread use of the Internet has also promoted the growth of the fringe economy.

The Internet poses dangers for poor and credit-challenged consumers because of its reach and its cloak of invisibility. For instance, short of doing extensive research, users have little knowledge of whom they are corresponding with or where those businesses are based. This anonymity has proved useful for various fringe economy operators and scam artists, many of which operate offshore.

E-commerce accounted for nearly $6.8 trillion in international sales in 2004, with almost $3.2 trillion of that in the United States alone.²⁷ The use of the Internet for mortgages, home refinancing, payday loans, debt-management plans, credit-repair services, and tax refund loans has been exploding. For example in 2003, 9% of all mortgages—$150 billion—were initiated online, a number expected to reach 15% in 2005.²⁸ Despite this potential, the Internet is mainly useful for transactions that don’t require the transfer of physical collateral, and it’s less useful when a face-to-face exchange of physical goods is required, such as pawns, transferring auto titles, or renting furniture and appliances.

The Internet has fostered a proliferation of online payday lenders with names like Sonic Cash, MyPaydayLoan.com, WeGiveCash.com, PayDay OK, the Cash Station, CheckAdvance.com, and National Payday Loans. Some of these online lenders offer bigger loans than states allow—up to $2,500—and charge interest rates exceeding state usury caps, sometimes in excess of 650%. Others make loans in states where payday lending is illegal, and in states that allow only brick-and-mortar storefront payday lending.27

Some online lenders automatically renew loans if they’re not repaid by debiting cash from the borrower’s bank account. Using the cloak of invisibility, many online payday lenders don’t provide phone numbers or physical addresses—only e-mail addresses—and borrowers may have trouble canceling transactions or resolving problems. Borrowers also face the security risk of sending bank account and Social Security numbers over the Internet to unknown lenders, which can result in identity theft or unauthorized debits.

The Internet has created a new playing field by enabling fringe corporations to skip over state commercial barriers, thereby providing fresh opportunities to circumvent usury laws. In fact, the Internet has allowed payday lenders, fringe mortgage lenders, and predatory credit card companies to operate not only outside of state laws, but sometimes even outside of U.S. borders. For example, payday lenders can use electronic transfers to send cash to borrowers through offshore banks.

State commercial barriers are being broken down in all areas, including credit cards. For example, consumers no longer have to apply for credit cards at local banks; instead, they can apply online to almost any bank in the United States. Some fringe lenders in states with strict usury laws have installed Internet kiosks that allow customers to apply for loans in states with liberal or no interest caps.

The technological revolution is increasingly making state usury laws almost anachronistic and is a factor in the explosive growth of the fringe economy. While the fringe economy is growing because of welfare reform, slow wage growth, the rising costs of necessities, and the Internet, it is also expanding because of increased use by the middle class, especially functionally poor middle-income families.