One in four utilities bills is paid in person, and often the transaction takes place within a payday lending establishment, according to a new report by the National Consumer Law Center. The report finds that there are over 650 licensed payday lenders serving as bill paying facilities for 21 public utilities companies, including 206 working for AT&T alone.
So, what’s the problem? According to the NCLC, locating bill pay centers in payday loan shops expose the most vulnerable consumers to heavy doses of payday lending “marketing” as well as high-pressure commission-based loan salespeople. And, despite the fact that utilities are closing down payment centers in favor of outsourcing and encouraging consumers to use electronic bill payment, the demand for in-person bill payment is growing by 5% per year.
So who are these mysterious consumers who like to pay their bills in person? According to the report they are also the sort of consumers who are most likely to take out a payday loan.
There is evidence that demand for in-person bill payment is strongest among low-income, minority and female customers. A 2004 study by Pacific Gas & Electric Co., a California utility with 5 million customers, described the company’s in-person bill payers as “lower income types, and credit averse individuals who have no other means of payment than cash.”
These are also the customers that are targeted by predatory payday lenders:
Or, as CheckFree tells prospective bill payment agents, collecting payments “offers the opportunity to turn a bill payer into a loyal customer.”
Utility walk-in customers make especially good prospects for payday lenders, check cashers and other high-cost lenders. Expansion of the market for high cost financial services has been fueled by population growth and “declining to stagnant growth in household income of lower- and middle-income people,” payday lender ACE Cash Express said recently. The company described its primary market as “the nation’s approximately 60 million unbanked and underbanked individuals.”
What does a payday lender mean by a loyal customer?
To a payday lender, a loyal customer is one who rolls their first payday loan over into a second, a third, even a forth and fifth loan, racking up fees and interest that can be double or triple the amount of the original loan. Far from being the exception to the rule, this sort of “loyalty” is the norm for payday lending customers. In fact, 9 out of 10 payday loans go to consumers who take out more than 5 such loans a year. The interest rate on a typical payday loan can be 400%.
From the report:
For retailers slow to make the connection, CheckFree has a pitch ready. “You have the stores. You want more customers. We have the solutions.” CheckFree says it acts as an intermediary between 11,000 third-party bill payment collection sites and 150 billers, including 50 utility companies, who farm out collection services. “Walk-in Bill Payment Services offers retail locations an easy and inexpensive way to generate foot traffic, retain more customers and grow your business,” the web site adds. “In fact, it costs you nothing and it even pays you a commission.” CheckFree, a company 10 percent owned by software giant Microsoft Corp. handles PG&E’s bill payment outsourcing.
CheckFree posted 2006 revenue of $879 million, recently had a market capitalization above $3 billion and includes on its board the former chairman of Visa International and former high-ranking executives of Bank of America and State Street Research. CheckFree also lists Progress Energy, Southern California Edison, AT&T, BellSouth and Verizon as customers for its outsourced bill payment services.
If CheckFree and other payday lenders like it can’t get a deal with the utility companies, they become “unauthorized” bill pay centers, collecting payments on behalf of the utility companies and charging a fee for the service directly to the consumer. Fees range from a few cents to $12.95 per bill paid.
Although payday lending is skyrocketing in “popularity” (the total amount of payday loan outlets grew from 2,000 in 1995 to 24,000 in 2007) the report argues that it’s not a reflection of consumer choice that bill pay centers are so often located in payday lenders. Only 7% surveyed said they prefer a payday lender as the location of a bill pay center. 4 out of 5 chose a grocery store as their preferred location.
So why are utilities sending their most vulnerable customers to locations where they will be subjected to a high-pressure commission-based predatory lending sales force? Simple. It saves them money. —MEGHANN MARCO
UTILITIES AND PAYDAY LENDERS: CONVENIENT PAYMENTS, KILLER LOANS (PDF) [National Consumer Law Center]