Segregation and the Cost of Money: Race, Poverty, and the Prevalence of Alternative Financial Institutions

Payday lenders, check cashers, and other “alternative” financial services (AFS) have garnered attention from policymakers and advocates for the poor because they are more expensive than traditional banking—constituting what some call a “Ghetto Tax.” This is the first study to explore neighborhood-level AFS geography on the national scale. Leveraging a dataset comprising the universe of AFS in 2015, I show that not only are there substantial differences in AFS presence between white and non-white neighborhoods, but that these disparities are largest in the most segregated metropolitan areas. This finding supports theories that racial segregation creates easily identifiable markets for institutions to avoid, target, and exploit. I further show that while AFS presence declines with neighborhood income, the gap between black and white neighborhoods is widest among high-income neighborhoods, reflecting the unique vulnerability of even affluent blacks to institutional marginalization. This work documents how the overlapping geographies of racial isolation and AFS prevalence shape the very cost of money for different racial groups, illustrating the importance of institutions transmitting the effects of racial isolation.