It seems unfair that in America, those with the least ability to pay in fact pay more than those with sufficient means. This is because our risk and reward system makes it easy for those serving the poor to charge more and unregulated. This extra charge has become excessive. It always creates a business opportunity for fair minded entrepreneurs. [more]
In two years of learning about social business, I haven't seen a more coherent statement of the American problem of poverty than DeNeen Brown's Washington Post article titled "The High Cost of Poverty: Why the Poor Pay More." A link to the entire article is provided below.
(Thanks to my son, Tim, who passed this article onto me.)
What Brown describes in detail is the seemingly counter-intuitive concept that those of us most able to pay in the USA are those who pay the least. Conversely, as an early line in the article states, "The poorer you are, the more things cost."
Seem strange? Not when you think about it.
When I want a gallon of milk, I drive to a super store and pay $2.99.
When my inner city counterpart wants a gallon of milk, they walk or take a bus to a corner store and pay $4.99.
My loaf of bread is a dollar, hers is $2.99; my pound of butter is $2.49, his is $4.49; and so on it goes.
It gets worse.
Brown goes on to explain other consumer products the poor pay more for. She also spends time on the greatest inequity in our system - short term lending.
Did you know that those who don't have a bank account pay $15 just to get a $300 paycheck cashed?
Did you know that if you do have a checking account but need some cash to get through to next payday, you write a $300 check to your payday lender and they keep $46.50 when that check goes through one week later?
So I looked into it a little deeper and found that there are more than 14,000 payday lenders in the USA doing about $42 billion (right, that's a "b") in business. And 91% of that revenue is from poor people who use payday lenders more than seven times a year!
The net result is that the net lending cost of $300 borrowed by the poor is - on average - $792.
Here in Ohio, the legislature were so disgusted by this practice that they outlawed payday lending two years ago by reducing maximum interest charges from 391% (yes, the law allows that in most states) to 28%. The special interests were so frustrated by this new law that they were able to get a statewide vote on the issue last November. Ohio voters ratified the new law by a majority of 64%.
Think they went away? Nope. This year over 1,000 payday lending stores in Ohio have obtained licenses to issue loans under different laws, one of which is called the Mortgage Loan Act. Under this law, these stores are now able to legally charge interest of $26.10 per $100 on 14 day loans - and APR of 680%!
I'm a classic businessman - not at all a liberal by definition since I believe deeply in the free enterprise system and the importance of turning a profit in business. I understand that if it costs more to do business in the inner city, more must be charged.
But I despise extremes. Brown's research in Washington, DC, and this example of our experience in Ohio scream extreme.
So, while businesses providing goods and services to the inner city must charge more to cover higher costs it seems more than excessive that they would charge ten or twenty times as much.
I wish I could change every broken business model I see, but I cannot. But in this case I'm going to try, if only in my own little corner of the world.
Next year our foundation will pilot a little retail business named Pay It Forward Lending.
We will test a model that counts on both the lender and the borrower to be FAIR with each other. We will use a social business model something like what Muhammad Yunus made famous in building the $10 billion Grameen Bank.
As you may know from previous TBOG articles and book references or from your own reading, the Grameen banking system is built on $30-$300 loans, mostly to women. Their model of success uses very fundamental ideas like all borrowers owning the bank and all borrowers meeting weekly in small groups to work to solve their own problems.
In his most recent book, Yunus says, "If you go out into the real world, you cannot miss seeing that the poor are poor not because they are untrained or illiterate but because they cannot retain the returns of their labor."
Until now, I thought that statement only applied outside of our country.
Now I see that the 37 million people in the USA who live below the poverty line may also be unable to "retain the returns of their labor."
What do they get for working at a fraction of the wage you and I make?
$4.99 gallons of milk and 397% APR interest rate loans.
I can imagine it's difficult enough to live on $7 an hour.
But it stretches my imagination to figure how much more difficult it would be to retain any of that money while paying so much more for being poor.
I hope though this writing I reach people who want to do something about that.