Which are more common in Washington state today, high-interest payday lending storefronts or Starbucks outlets?

The answer may surprise you. It certainly surprised us. There are far more payday lenders (716) than Starbucks stores (585). Despite the fact that the payday loan industry has been in existence here for only a little more than a decade, there is a good chance one is closer to you – particularly if you live in a lower-income neighborhood or near a military base – than the nearest Starbucks.

Contrary to the protestations of the industry, which has been allowed to operate under loose rules that exempt it from many of the regulations placed on traditional banks, that is not a good thing.

Research shows that lower-income families in Washington face a large gap between their incomes and the costs of basic necessities. That gap is made worse because they are often required to pay more relative to higher-income families for the same things. A key example of this obstacle is the market for basic financial services.

While even moderate-income families are often able to cash checks free of charge, lower-income families can pay hundreds of dollars annually for comparable services. Furthermore, while credit cards carry average interest rates of around 12 percent, the short-term loans available to lower-income customers typically charge the equivalent of over 390 percent APR in interest.

There are a several reasons why people draw on these expensive products:

 • Mainstream financial institutions inadequately meet the needs of lower-income Washingtonians because of real and perceived higher costs associated with serving lower-income consumers.

 • Insufficient or lax regulation paired with unscrupulous business practices drive up prices.

 • Lower-income consumers often lack access to sufficient information about banking services and face language and cultural barriers.

 • High-priced check cashers, payday lenders and pawnshops conduct aggressive marketing.

 • Our mapping of financial institutions across Washington shows that high-priced financial services are heavily concentrated in low-income neighborhoods. In the poorest one-fifth of neighborhoods, there are 26 payday lenders, check cashers and pawnshops for every 100,000 residents, compared to 12 in middle-income neighborhoods and only two in the richest neighborhoods.

In the Tacoma area, there are 48 payday lenders in the lower-income 29th Legislative District, compared to nine payday lenders in the wealthier 26th District. There are none on very wealthy Mercer Island.

The good news is that the payday lending problem is not intractable. A number of local initiatives around the country are working to reverse these trends. Already, over 1,000 credit unions and banks nationwide offer short-term loans to customers at much lower cost.

As one example, since 2001 the North Carolina State Employees Credit Union offers a payday loan alternative that has been popular, profitable and inexpensive for borrowers. NCSECU’s Salary Advance Loan offers up to $500 in short-term credit at only 12 percent, a charge of less than $2.50 for a two-week loan of the full amount. In Washington, those customers would pay $75 in fees, or 391 percent, at a payday lender.

And the NCSECU program sets aside 5 percent of the loan amount in a personal savings account, which generated more than $6 million in deposits for borrowers in its first 18 months.

Opportunities to create such products in lower-income neighborhoods exist in this state. In the 29th District, for example, there are 46 banks and credit unions already there that could be encouraged to offer such services.

In 2005 alone, consumers of payday lenders in the 29th Legislative District took out $92.7 million in loans and paid $11.6 million in fees.

According to Brookings Institution estimates, $10.3 million of those fees (89 percent) could have been saved if an alternative option such as the North Carolina model had been available in their neighborhoods.

The potential savings to consumers statewide tops $155 million.

Lawmakers have the opportunity to address the high-interest lending problem now. Based on the experiences of other states, we suggest:

 • Encouraging Washington’s existing mainstream financial institutions to adapt successful and profitable product lines and customer service norms that have worked for lower-income consumers in other states.

 • Encouraging entrepreneurs to create new local market-based alternatives to the high-priced financial service providers.

 • Curbing unscrupulous business practices through regulation of financial services provided both by the check casher/payday loan industry and mainstream financial institutions.

 • Promoting financial literacy among lower-income consumers and expanding access to online tools that allow comparison shopping for financial products.

A belief in equality of opportunity is shared throughout Washington state. That value is weakened when the cost of basic needs such as financial services is dramatically higher for lower-income families.

The time for serious reforms that align our practices with our principles is at hand.

Jeff Chapman is research director and Remy Trupin is executive director of the Washington State Budget and Policy Center, a nonprofit policy research organization.