Following the Money: How Bank Financing Shapes the Geography of Payday Lenders

• In Event: Inequality, Race, and the Politics of the Fringe Economy

Abstract

Access to consumer credit is important for families’ financial well-being, but there are significant inequalities in this access. Examining the supply-side forces contributing to this unequal access can identify mechanisms shaping the geography of opportunity for families’ engagement with financial institutions. In particular, longstanding commercial credit arrangements between mainstream banks and high-cost payday lending companies may influence the spatial distribution of payday lender storefronts across communities.

To evaluate this, I develop an innovative dataset that connects national, historical spatial data on the locations of payday lender storefronts and bank branches to archival records of financial ties between bank and payday companies. I first identify the network of financially-tied banks and payday lenders, which includes some of the largest banking and payday lending companies in the US. I then incorporate this network information (i.e., whether banks and payday lenders are “in-network” or “out-of-network”) into fixed effect linear probability models predicting the probability of a payday storefront opening in a given local community, net of other time-varying community characteristics and state-level payday lending regulations. Analyses consider payday storefront openings occurring in all US urban Census tracts between 2001 and 2019.

Preliminary results indicate that in-network payday lenders are significantly more likely to open a storefront in a community where a financing bank is present, compared to payday lenders not receiving such financing. At the same time, in-network and out-of-network payday lenders remain equally as likely to open in communities home to only out-of-network banks or no banks at all. In other words, in-network banks and payday lenders are more likely to co-locate in the same community, with possible distinctions in the types of communities well-financed lenders serve compared to those served by lenders not receiving such financing.

Together, findings suggest that market relationships shape local credit access and associated costs of credit, with implications for regulation. While direct partnerships between banks and payday lenders are regulated, commercial financing between the two is not. Yet, the influence of bank financing on the spatial sorting of payday lenders across communities suggests that this may be an area in need of regulation.

Author

• Megan Doherty Bea, University of Wisconsin-Madison