The Object Economy
The banking “alternative” of a Chicago-area pawnshop
I. BEYOND THE DISPLAY WINDOWS
It’s a few days after the first polar vortex in early January 2014. Outside, Chicago is beginning to thaw from its deep freeze, but the warmer temperatures and heavy rains have produced treacherous streets of snowy, icy slush. Inside, business is slow at Second City Pawn, a pawnshop in a small strip mall on a nondescript intersection of a Chicagoland neighborhood.
The shop’s doorbell rings and a man clutching a Mac laptop computer is buzzed through the front door. He appears to be in his late 20s, with thinning brown hair, glasses, and a long, scruffy beard, bundled in a black jacket over a hoodie and sweatpants tucked into white athletic socks.
He walks through the meticulously arranged showroom, past walls that are lined with flat screen televisions, laptop computers, musical instruments, air conditioning units, blenders, and toasters; past a glass case with neatly ordered cell phones, GPS devices, and digital cameras; past another stocked with jewelry, each piece perfectly polished and lit-up by the case’s interior lights. At the back of the shop, he places the laptop on the main service counter, and says he wants to pawn it.
Anthony, one of the store’s employees, stands behind the counter. He has a big smile and large brown eyes that attract the attention of many of the shop’s female customers, which his colleagues tease him for.
Anthony takes the laptop and inspects it, looking for damage to the body, turning it on to make sure it works, and checking the model and memory. While he goes through his process, the customer offers an explanation—unprompted—for his presence:
I think because of the budget cuts the city is cracking down on collecting all kinds of tickets. [pause]. I have no problem paying, I just have a really low-paying job right now [pause]. My mom just sold me the computer and I’m really happy with it, but I can’t borrow money from my parents to pay the city.
Without a comment on the story, Anthony offers the man a loan of several hundred dollars and directs him into a booth next to the counter. From the back room, with several inches of bulletproof glass between them, Anthony enters some information into his computer and prints two copies of the loan receipt, or “ticket”: one for the store and one for the customer. After signing the store’s copy, the customer takes the cash Anthony slides under the teller window. Thank yous are exchanged, and the customer takes his money and exits the store as uneventfully as he entered, his laptop left sitting on the counter.
II. CUSTOMERS OF THE FRINGE ECONOMY
Second City Pawn’s unassuming storefront represents just one piece of a vast collection of businesses referred to as Alternative Financial Services, or the “fringe economy.” These legal businesses, including pawnshops, payday loan centers, and money order and check-cashing outfits, among others, provide credit and payment services to the public, but are regulated by different laws than banks. The Federal Deposit Insurance Corporation (FDIC) estimates the transactions volume of the fringe economy to be more than $320 billion annually.
Fringe-banking enterprises mainly serve people with low or moderate incomes who lack access, or have limited access, to more conventional banking services. They make their money off of the high interest rates and fees charged for their services. In the case of pawnshops in particular, an object of some specified market value, as determined by the shop, is used as collateral for a cash loan. To renew the loan and maintain ownership of the object, customers must pay the interest and fees, generally upward of 20 percent per month in the U.S.; to retrieve the object, customers must pay the principal amount in full—that is, one lump sum—in addition to the outstanding monthly charges.
The word “fringe,” however, is perhaps a bit of a misnomer. In 2011, over 40 percent of all U.S. households used an alternative financial service at least once, according to the FDIC. That figure rises to 65 percent among the quarter of U.S. and Chicago-area households that are “unbanked” (lacking a checking or savings account) or “underbanked” (connected to, but underserved by, conventional banking institutions). In reality, a financial system used by more than a third of all households each year is not “fringe.” Instead, these services are a crucial component of the financial lifeway of many Americans.
Pawnshops hold an important place within this alternative financial system. According to the same FDIC survey, they are the most popular alternative credit source in the U.S., with just shy of 3 percent of all U.S. households having used a pawnshop at least once in 2011. (Comparatively, payday loan businesses were used by only 1.7 percent of U.S. households in 2011, despite the fact that these businesses have received the lion’s share of regulatory attention in recent federal-level policy discussions.) More than one in ten unbanked and underbanked households used a pawnshop at least once in 2011.
This significant customer base is also very socially and economically diverse. An average day at Second City might bring in a middle-aged woman who lifts her floor-length fur coat as she gets out of her Lexus to avoid the winter slush as well as an old man with a scraggly beard and worn clothes, who drives to the shop in an old red sedan from his subsidized apartment nearby. Parents arrive with their children, and college-aged adults come in boisterous small groups, cracking jokes and teasing one another all the way through a transaction.
This diversity does not mean that the clientele perfectly reflects the surrounding community, however. According to data Second City Pawn keeps, all major racial and ethnic groups frequent the store, but given the demographics of the neighborhood, Blacks and Hispanics are overrepresented.
Overrepresentation of minorities is true for the fringe banking economy on a national scale, too, where nearly 64 percent of Black households, over 54 percent of Hispanic households, and just shy of 28 percent of Asian households used alternative financial services in 2011, while just under 38 percent of white households did according to the FDIC. Pawnshop patrons are also disproportionately likely to be young, female, and lack a high school degree—though nearly a third of college-educated households used at least one fringe banking service in 2011.
In other words, no one demographic group dominates the alternative banking sector’s clientele. At the same time, fringe-banking use is disproportionate among groups that already face barriers to social and economic equality, including racial and ethnic minorities, women, the less educated, and the young, not to mention lower income households. Use of these so-called “fringe” services, then, is at once widespread and deeply correlated with socio-economic inequality.
III. THE ECONOMY OF A PAWNSHOP
After the customer leaves, Anthony emerges from the backroom to attend to the Mac waiting for him on the showroom counter. The laptop is now legally in pawn and cannot be sold, or even shown to customers, as long as the loan is active. Anthony covers the computer in several sheets of plastic wrap for protection, affixes the corresponding ticket, and places it on a shelf in the shop’s non-jewelry storage room. There, among a small collection of other laptops, it will sit untouched, accumulating 20 percent interest. To keep the loan active—and to keep the computer in Second City Pawn’s back room—its owner must pay that interest each month. To take the laptop back, he must pay back the loan’s principal in full. If he defaults on the monthly interest payments, the laptop becomes another secondhand acquisition for the shop.
At Second City Pawn, customers generally receive a loan for 50 percent of their object’s used value, though they can get up to 60 percent for gold, thanks to its more reliable global market. Loans are extended for 30 days at a time, and interest and fees for loans under $300 are 20 percent, or the equivalent of a 240 percent APR on a credit card. Of course, a credit card or bank loan at 240 percent interest would be unheard of. But pawnshops are regulated separately from bank branches and credit cards.
In Illinois, most “mainstream” credit is regulated by the Interest Act, which caps annual interest rates at 9 percent. Pawnshops, however, are regulated by the aptly titled Pawnbroker Regulation Act. Still, if 20 percent monthly interest sounds too usurious to be legal even for pawnshops, it is. The Illinois Pawnbroker Regulation Act caps interest at 3 percent per month, or 36 percent APR. But shops may charge additional “non-interest” fees. Second City Pawn’s interest is technically 3 percent per month for loans less than $300, but the “service charge” is 17 percent per month for these same loans.
Legally, pawnshops cannot sell an item in pawn, but these interests rates mean that it would make little economic sense for them to even want to. Only if a customer stops making the interest payments does the pawnshop obtain legal possession of the object and then try to sell it. But this is generally a less lucrative outcome, and pawnshops try to prevent loan defaults, often extending the short-term loans indefinitely so long as the customer is paying the interest each month.
That does not mean that retrieving the object is made easy, though. Customers can only take their items back by paying the entire principal loan amount in one lump sum, in addition to the outstanding monthly interest and fees. Since this can be financially difficult for many customers, items often remain in pawn for many months and even years. But this is precisely what the pawnshop wants, as collecting interest involves little work on their end.
During my time at Second City Pawn, Joey, the owner, who has an imposing physical stature and a thick head of neatly groomed silver hair, extolled the virtues of his business model to me. On more than one occasion, Joey proudly declared that he serves many people who might otherwise be financially destitute, particularly in a moment of crisis. For example, if someone lacking a good credit history is suddenly laid off, she can still receive a financial lifeline from Second City Pawn. But these same theoretical characteristics, Joey explains, make his loans “high risk” and justify the interest rates he charges.
It’s true that pawnshops provide an important, and distinct, last resort for many customers, even compared to other fringe-banking services. Unlike almost all other kinds of credit lenders, including payday lenders, pawnshops extend loans without running a customer’s credit report. For this reason, customers who might be denied credit for unemployment, low income, absence of a checking account, or previous loan defaults, would not be denied a pawn-based loan—such information would never be known by the pawnshop.
But less intuitive factors that also show up on credit reports may also significantly reduce the likelihood of receiving a loan, including not having a high school degree, not being married, or having any kind of arrest or criminal conviction history. That having a criminal conviction, particularly a felony conviction, ruins a person’s credit should not be diminished in an era of mass incarceration, where an estimated 7.5 percent of all adults are current or ex-felons in the U.S. Ruined credit represents yet another collateral consequence of incarceration, or what political scientist Marie Gottschalk refers to as “civil death,” leaving tens of millions of Americans potentially in need of an alternative route to financial assistance.
At the pawnshop, an item of value is the one, hardline requirement for loan eligibility, dissolving social and economic histories that otherwise inform financial worthiness. Perhaps this is why the small, white television the shop uses to test game stations and DVD players, which is the model of television available to Cook County Jail inmates, is not an uncommon conversation starter amongst customers. Indeed, the very fact that the shop elects to use this as their permanent in-store television signals to knowing customers that in the pawnshop, objects alone can be judged for their histories, and any history is potentially of value.
Joey’s observation that his loans are “high-risk” for these reasons is not entirely accurate, however, since in practice, pawnshops mitigate almost all actual risk through the collateral of the pawned object itself. After just five months of interest payments, a customer has paid the store the total amount of the principal in interest alone. Thus, if a customer receives a $250 loan on a $500 computer, within ten months he will have paid the entire value of the computer, $500, in interest—and still needs to gather the full $250 principal if he wishes to have his computer back.
IV. BEING A GOOD CUSTOMER
On a late spring Friday, Second City Pawn’s front door buzzes and a large woman in her 50s walks through. The store’s employees greet her enthusiastically by name—Kay—and she returns the greetings without pausing on her way to the booths at the back of the shop.
I follow close behind Miguel, the assistant manager, who heads into the back room while Kay is still making her way to the booths. Through the booth’s bulletproof glass, Kay removes several pieces of gold jewelry from her purse and says she’s looking for a $300 loan. Miguel takes the jewelry from under the thick glass, tests each piece to determine the number of karats and tallies its value on a calculator next to his scale.
It comes to 280, but since you’re a good customer, I’ll give you three.
Kay nods in appreciation. Miguel finds her in Second City Pawn’s database, enters the new loan, and prints the tickets. Kay tucks her copy into her bag and begins to exit the booth, exchanging goodbyes with Miguel.
Before she is even out of the store, Miguel tells me that Kay has eight tickets out right now, including a few for more than $1,000 each. One of those is a $1,100 loan from the previous year on which she has already paid $900 in interest. I must look surprised, because Miguel adds:
If people were responsible with their money, pawnshops wouldn’t be in business. People drive up here in a fancy new Hummer, big rims, and they need twenty dollars to pay for gas. They can’t afford that car!
Kay did not drive to the shop in a Hummer. I have no way of knowing why Kay needs her loans, but that is clearly not it. Still early into my research, it also struck me that a person so indebted to the shop would be given even more loans.
But in fact, Kay is a prototypical “good” pawnshop customer: someone with multiple large tickets, but who reliably pays interest. In fact, if taking out more loans means the prolongation of older loans, then that is the best possible outcome for the store, so long as the monthly interest on all the loans is being paid.
In other words, a good pawnshop customer looks strikingly similar to someone with good “mainstream” credit. In a pawnshop or on a credit card application, the ideal customer is one who is already indebted but who has established a good payment history. The calculation of creditworthiness at the pawnshop involves far fewer total factors that the complex tabulations made by credit rating agencies, but the bottom line is still largely the same.
The gap between traditional banking and alternative credit services shrinks even further if one compares pawnshop lending practices with the subprime mortgages extended at high rates in the early to mid 2000s, not to mention similar predatory lending practices credit card companies were engaging in over the same time period. Such predatory practices thrive off of hidden fees and high interest rates that are supposedly justified by their customers’ higher risk. But ultimately, as a 2012 report by the Center for Responsible Lending summarizes, the “high-cost penalty fees and interest didn’t mitigate risk, they were the risk.”
What’s more, existing evidence suggests that use of pawnshops and other alternative credit sources are used for more essential living expenses than are credit cards. The 2011 FDIC survey showed that the top reasons for use of alternative services are basic living expenses (such as food, gas, bills, and even rent), making up for lost jobs or decreases in income, buying a home appliance, and house or car repair. Non-essential expenses, such as gifts, were far less common. According to a national survey conducted by the Opinion Research Center (ORC), though, the top reasons for credit card use are clothing, gas, and dining out, closely followed by travel. Of course, data from both surveys cannot tell us if respondents are trying to live above their means. But even so, there is no evidence to indicate that this is happening with any greater frequency within fringe-banking services than in more traditional forms of credit services. What evidence does exist suggests that perhaps the reverse is true.
The shop certainly still feels like a different banking model, though, even if many of the practices—and the majority of customers—overlap with the traditional banking sector. After all, Second City is a place where an employee might cajole a well-known Chicago blues musician into playing a few chords of “Foxy Lady” on the guitar he is about to pawn yet again, or where employees tease a regular who is seemingly intoxicated and isn’t wearing shoes, but will still give him a loan.
In other words, in addition to the structural factors that make Second City Pawn a potentially more inclusive financial space, such as a lack of credit checks, the owner and employees also actively cultivate an environment that not only accepts the transcendence of many norms in banking decorum, but also appears to warmly encourage it. In fact, the Center for Responsible Lending discovered in focus group interviews they conducted with Black fringe-banking customers that the disposition of the staff was one of the factors they liked best about such businesses.
Miguel’s remarks about Kay are all the more striking, since Miguel is a full participant in the cultivation of this looser, less judgmental customer service environment. In fact, Miguel can often be heard poking fun of the customers he perceives act like they are “above” the store or “too good for” it after they leave. Miguel and the other employees also frequently expressed sympathy for customers they knew were going through a period of financial hardship, such as being laid off, and would speak more abstractly about customers periodically as people who just needed a little help making ends meet, much as Joey, the store owner, describes his customer base.
Yet these beliefs constantly clashed and competed with narratives of just deserts, or “market fools,” in the words of sociologist Fredrick Wherry. These are people who don’t know how to manage their money, and are seen as not only needing, but also deserving the difficult financial situations they find themselves in. The archetype collapses an enormous pool of potential reasons why a person may need a pawnshop loan into the single category of fiscal irresponsibility. It also fully ignores the fact that in order to work as a business model, pawnshops do not inherently need to be so fiscally punitive; instead, federal and state legislation together create the condition of possibility for these excessive interest rates and fees.
These contradictions are one of the defining features of Second City Pawn. In eschewing some of the traditional banking practices, both financial and social, the pawnshop also creates a space that engenders many assumptions about customers based off of the smallest, most vague social and financial biographic snapshots. What’s more, the un-bank-like atmosphere obscures many of the same institutional behaviors of the traditional banking sector: the profile of a “good customer,” the calculation of risk, or the idea that financial hardship is a result of individual fiscal irresponsibility.
V. WHAT KIND OF ALTERNATIVE?
Beyond the practices and assessments that occur within the pawnshop, the socio-geographic patterning of pawnshops across the city of Chicago tells its own, related story of connectivity to traditional banking practices in other deeply troubling, but also perplexing, ways.
The map above plots shop location against median income, clearly showing that pawnshops are not located in the poorest neighborhoods of the city, but instead largely in low- to medium-income areas, as well as areas with a significant range in income. Given the description of a “good customer” as someone with both objects of value to pawn as well as the means to pay the interest each month, but perhaps not quite enough income to pay off the entire loan, this makes sense.
However, this is not a simple story of economics. The next map plots registered pawnshop location against racial and ethnic identification. This map shows that while pawnshops are located in many racially and ethnically diverse neighborhoods of the city—which we would expect given the data from both Second City and the FDIC—pawnshops are not well represented in mixed income, majority-Black neighborhoods in Chicago. Much like their conventional counterparts, then, pawnshops appear to be discriminatory in their provision of services to Black residents of the city. This is ironic both because pawnshop customers are disproportionately Black, and also because the business model largely depends on people who have few other options, a group we know to be disproportionately Black. It appears, then, that Black residents of the city have less access even to a banking service that many would describe as predatory.
This avoidance of majority-Black neighborhoods calls the “alternative” offered by pawnshops into question yet again, as its banking model seems ever more closely patterned off of the conventional banking sector, but with an even more vulnerable population and looser regulation. It is another way in which the localized economy of the pawnshop, specifically structured to allow broader access to credit than its conventional counterparts, ultimately reproduces and lends greater credibility to the kinds of social and economic practices that undergird the current social and economic inequalities patterned throughout a highly segregated city.
The existence of a true alternative is therefore, at least in part, illusory. The financial instruments of the pawnshop are crafted of different working components than their mainstream counterparts.But calculations ranging from who is deserving of (more) credit to where pawnbrokers should open shop, hinge on exceedingly mainstream, and often incredibly destructive, economic reasoning, which masks discriminatory and profit-driven practices in financial calculations and determinations that only appear objective, but in fact, are not.
That said, in questioning the labels “fringe” and “alternative,” I don’t wish to suggest that the differences between pawnshops and other alternative financial institutions and traditional banks, in both who and how they serve, are insignificant. However, I do wish to probe the assumptions that labels like “fringe” and “alternative” can hide. For if we do not probe, we will only continue to reify socially constructed labels that justify discriminatory economic practices rather than offering a true means to escape them.