Relational foundations of an unequal consumer credit market: Symbiotic ties between banks and payday lenders

• Published date: 01 January 2023
• Author: Megan Doherty Bea
• Date: 01 January 2023
• DOI: http://doi.org/10.1111/joca.12501

RESEARCH ARTICLE

Relational foundations of an unequal consumer

credit market: Symbiotic ties between banks

and payday lenders

Megan Doherty Bea

Department of Consumer Science,

University of Wisconsin-Madison,

Madison, Wisconsin, USA

Correspondence

Megan Doherty Bea, Department of

Consumer Science, University of

Wisconsin-Madison, Madison, WI, USA.

Email: mbea@wisc.edu

Funding information

Qualitative Data Repository, Syracuse

University, Grant/Award Number: 2018

Annotation for Transparent Inquiry

Challenge

Abstract

Banks have financially supported payday lenders for

decades. In this article I qualitatively demonstrate how

these financial relationships have reinforced and

expanded a bifurcated consumer credit market, and

why these relationships matter for consumer access to

financial services. I use archival financial documents

from publicly traded payday lending companies

between 1996 and 2014, available through the Securi-

ties and Exchange Commission, to construct the

bank-payday lender network and reveal motivations

for these financial relationships. I find that bank-

payday lender relationships are sustained over many

years, and that these relationships are mutua lly bene-

ficial, enabling payday lender expansion and

providingawayforbankstoquietlyprofitfromhigh-

interest lending in the face of other regulatory con-

straints. Further, I show that these relationships have

significantly reshaped the consumer credit market

over the past two decades. I conclude by considering

broader implications of symbiotic institutional rela-

tionships in contemporary markets.

KEYWORDS

consumer credit, financial markets, payday lending

Received: 28 September 2021 Revised: 7 May 2022 Accepted: 21 October 2022

DOI: 10.1111/joca.12501

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which permits use,

distribution and reproduction in any medium, provided the original work is properly cited and is not used for commercial purposes.

© 2022 The Author. Journal of Consumer Affairs published by Wiley Periodicals LLC on behalf of American Council on Consumer

Interests.

320 J Consum Aff. 2023;57:320–345.

wileyonlinelibrary.com/journal/joca

Credit is a central feature of household finance within the modern US economy

(Krippner, 2017; Lin & Neely, 2020). In an economic context defined by rising economic insecu-

rity for many households (Hacker, 2006; van der Zwan, 2014), credit has served as a way to

smooth income volatility in the face of a shrinking social safety net, rising costs of living, and

wage stagnation (Hodson et al., 2014; Trumbull, 2012). Yet, consumer access to unsecured prod-

ucts like credit cards and other personal loans that do not require collateral is unequal, with

many individuals unable to access bank-based products due to discrimination, inability to meet

credit score and asset thresholds, or both (e.g., Baradaran, 2015; Faber, 2019). As a result, the

contemporary consumer credit market is reflective of a bifurcated financial system where many

families of color and families in poverty have long been excluded from full access to “prime”

consumer loans and instead must rely on higher cost credit products, like payday loans.

Although a robust body of interdisciplinary literature is focused on the ramifications of this

bifurcated system, less is known about the role of institutional actors in facilitating its creation.

Specifically, as consumer advocacy groups note, banks provide commercial credit to many

national payday lenders (Connor & Skomarovsky, 2010; see also Rivlin, 2010). Given that banks

and payday lenders are both offering consumer credit products, such financing likely has signif-

icant implications for the consumer credit market. In what follows, I use archival financial doc-

uments from 1996–2014 for publicly traded payday lenders available through the Securities and

Exchange Commission (SEC) to ask: what is the nature of these within-market financial rela-

tionships, what are the motivations for sustaining them, and what are the consequences for the

marketplace? Findings underscore that these arrangements do not operate on the margins of

the consumer credit market; instead, they consistently involve the largest banks in the

United States. Through inductive text analysis of SEC documents, I find that these seemingly

mundane, transactional relationships bring benefits to both parties that would be otherwise

unavailable, resulting in a symbiosis between mainstream and high-cost consumer credit pro-

viders that expedites the extraction of profits from poverty.

These relationships have significant consequences for consumers: I find that these relation-

ships facilitated the national growth of the payday lending industry, making lower quality credit

more readily available. These relationships also have consequences for regulation of the con-

sumer credit market. I show that incentives for banks and payday lenders are reoriented to the

maintenance of these financial relationships, but existing regulatory efforts to do not account

for these ties. In the absence of acknowledging the ways in which banks and payday lenders are

intertwined, it is unlikely that regulation alone will incentivize private industry to provide basic

financial services to families in a fair and equitable manner. Similar financial relationships are

occurring elsewhere; I conclude by considering the broader implications of symbiotic market

relationships for inequality in other consumer domains.

1|LITERATURE REVIEW

1.1 |The rise of payday lending in the consumer credit marketplace

The consumer credit market has a specific legal context that allows both banks and lenders to

offer consumer credit products. Prior to the 1970s, interest rates on credit were capped in a

majority of states through state usury laws (Peterson, 2008). Banks had relatively little engage-

ment with consumer credit until the 1978 Supreme Court case, Marquette National Bank versus

First Omaha Service Corp, allowed national banks to “export”interest rates from their home

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