Association for Public Policy Analysis & Management

Engagement with mainstream financial institutions is critical for building wealth and economic security. However, access to these institutions is socially and spatially unequal. The payday lending industry, which charges high fees and interest for consumers to borrow against future paychecks, has grown rapidly within the United States since the late 1990s, expanding the subprime credit sector. Payday loans come with significant costs and their structure can trap individuals into cycles of debt. Prior empirical research has shown that payday lenders predominately cluster around communities with lower median incomes and/or higher shares of black and Hispanic households, while banks have increasingly consolidated their consumer services, closing branches in many of these same communities.

These analyses, however, do not consider the implications of the substantial financial connections between payday lenders and mainstream banks. Banks provide commercial credit to many national payday lending chains, creating an exchange of resources best described as “financial symbiosis.” Payday lenders rely on this bank financing to sustain and expand their business operations. In turn, banks profit from interest on the commercial credit and have access to private information about payday lenders’ business activity through regular financial reports. Business incentives for both parties likely shift toward sustaining this resource exchange, but it is unclear how this might affect local credit markets.

Does this financial symbiosis influence the spatial distribution of bank branches and payday lender storefronts across communities across the United States? If so, how does this spatial patterning differ from that of banks and payday lenders who are not financially connected? To answer these questions, I analyze an original longitudinal geospatial dataset on payday lenders, bank branches, their financial relationships, and the neighborhoods they serve in the Denver Metropolitan Statistical Area between 1995 and 2014. This dataset combines state information on payday lenders, bank branch data from the Federal Deposit Insurance Corporation, financial relationship information from the Securities and Exchange Commission’s Edgar Database on publicly traded payday lenders, as well as neighborhood-level socioeconomic and demographic Census data.

Using this novel dataset, I first show that there are significant and long-running financial ties between payday lenders and banks, with large mainstream banks involved in credit arrangements with multiple payday lending chains over the past two decades. I then apply spatial regression techniques to assess whether and how the presence of a financial relationship, defined by participation in a bank-payday lender commercial credit arrangement, changes the risk of bank branches and lender storefronts opening across zip codes. Models account for company-level and branch/storefront characteristics, neighborhood socioeconomic and demographic characteristics, and measures of local market saturation and competition, as well as spatial lags for neighboring zip codes’ characteristics. Preliminary findings suggest that financial symbiosis matters most for banks engaged in the practice, with the presence of payday lenders in the prior year positively associated with an increase in the likelihood of these banks’ entry into the market. This suggests that bank-payday lender networks may be an important supply-side mechanism in the geography of consumer credit access.