Banks and payday lenders: Friends or foes?

It is widely known that banks and payday lenders do not cater to the same customers. Banks typically serve moderately and higher income individuals as well as small and median size enterprises. Payday lenders, on the other hand, typically serve lower income individuals. The biggest difference, however, given this difference in customers is that payday lenders charge interest rates that are 30 to 80 times those charged by banks. Moreover, given the customer base of payday lenders consist of lower income individuals, it also is typically the case that these individuals largely belong to different demographic groups than individuals typically served by banks.

The purpose of this paper is to investigate the geographic distribution of payday lenders versus banks throughout the nation. This will be done using county level data for all 50 states during the past decade to include the pre-crisis and post-crisis periods. The analysis will take into account differences in economic factors and demographic characteristics across the counties. This will enable one to assess whether demographic characteristics are important determinants of the number of payday lenders relative to banks after taking into account economic factors. Moreover, the analysis will examine the relationship between the number of payday lenders and community and smaller banks in counties to determine whether it is different for small banks as compared to big banks.

Based upon the empirical analysis, the paper will discuss various policy options that may make credit available to lower income individuals at lower interest rates in contrast to the current situation. This is important because almost every year there are policy makers who express concern about the high interest rates charged by payday lenders and the need to enact reforms to address the situation.