Does Fringe Banking Exacerbate Neighborhood Crime Rates? Investigating the Social Ecology of Payday Lending

Abstract

Research Summary: Payday lenders have become the banker of choice for many residents of poor and working class neighborhoods in recent years. The substantial costs that customers of these fringe bankers incur have long been documented. Yet there is reason to believe there are broader community costs that all residents pay in those neighborhoods where payday lenders are concentrated. One such cost may be an increase in crime. In a case study of Seattle, Washington, a city that has seen a typical increase in the number of payday lenders, we find that a concentration of payday lending leads to higher violent and property crime rates, controlling on a range of factors traditionally associated with neighborhood crime. Social disorganization theory provides a theoretical framework that accounts for this relationship.

Policy Implications: The findings suggest policy directions for making financial services available on a more adequate and equitable basis and for increasing the safety of urban neighborhoods. Specific recommendations include capping interest rates, limiting the concentration of fringe banking businesses, and redirecting law enforcement resources to neighborhoods where these businesses are located.

Keywords: neighborhood crime, social ecology, payday lending, social disorganization, local institutions