The Case of Rent-to-Own Assignment

In many communities, the rent-to-own (RTO) industry is seen as an alternative to traditional retail sales, but

some critics believe it is an alternative that preys on the poor and exacts too great a cost. For people living

in lower socioeconomic communities, the RTO retail alternative often seems like a viable option. Unable to

obtain traditional credit or purchase more expensive goods, such as furniture or appliances, RTO businesses

seem to give those in disadvantaged economic positions a local and lower payment option to obtain the

products they could not seemingly otherwise purchase. Although they may pay more for the product in the

end, they can acquire RTO beds for their children, new appliances for their families, and new TVs and

computers for enjoyment and work right now. Prevailing cultural and societal perceptions suggest that these

material goods are important to self-esteem as well as local social status, and so, many people are willing

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to sacrifice so that they can have these products. Growing up, Jamal’s older friends and family members in

a nearby poor community often visited local RTO shops. It seemed like a normal way to get the products

they couldn’t afford to buy outright from retailers further away. After leaving his community to attend college,

Jamal has decided to return home to find work and be close to his family again, and a local RTO business

has contacted him about a position as a district manager. As Jamal learns about the exchange relationships

between the RTO shops and their underprivileged consumers, he wonders how to align his personal and

career goals with those of his community and the business that appears to give them what they want. He

clearly sees the upside of the current arrangement for himself, senior management, and their employees, but

he questions whether this exchange is in the best interest of their customers. Ethically, he wonders if fairness

is achieved when the products sold are at premium prices but not available elsewhere. Are the gains relative

to losses a fair bargain across all parties? Management clearly believes that customers choose to buy from

them because they see it as a legitimate transaction. Does the lack of typical options make a difference to

this case?

Moving Up the Socioeconomic Ladder

Jamal Walker was raised in the northern section of a large urban area that was known for its crime and

destitution. He was the third child of a single mother who worked two jobs so that her sons could have

opportunities beyond the neighborhood in which they lived. Jamal’s earliest memories were of his brothers

walking him to pick up their mother from one of her jobs so that she returned home safely. At the time, he did

not understand what the problem was; the landscape was familiar and did not seem threatening, at least when

his older siblings were present. They continued living there until Jamal was ready for school, and then they

moved to the next community over so that he could attend a better program. His early years were uneventful,

and he was considered an exceptional student by his teachers.

As he grew up, Jamal would go back-and-forth between these two communities with his family, visiting his

relatives, former neighbors, and friends. The contrast was significant enough that he recognized a relative

lack of supermarkets, banks, bookstores, and parks in his old neighborhood versus his new neighborhood. It

seemed odd to be either stuck inside people’s homes or hanging out in the streets in his old neighborhood,

while he could go to the mall or meet at a local park to play alongside other children his age in his new

neighborhood. Jamal knew that several friends and family members visited local RTO shops in his old

community instead of traveling to bigger stores in other neighborhoods. His friends were always proud to

share when they got a new TV or computer or game from one of those stores and he shared in their

excitement.

Jamal eventually graduated from high school, went off to the state college, and received a degree in

marketing management. Jamal was recruited out of college by a large consumer goods retailer and launched

a career in retail management, which took him all over the United States in his first 10 years of work. After

all this time away from home, Jamal became homesick and wanted to move closer to his family and friends.

His mother was now in her early sixties and suffering from several ailments. Both brothers were in their

original city, raising families of their own and working for small, but profitable, firms. Jamal had recently been

contacted by the largest RTO retailer in the region, and they were looking to hire a district manager. The job

paid well, would allow him to live near his mother, and it came with work responsibilities that could advance

his career. The interview with the regional manager went well, and he was offered the manager job running

five stores in and around his childhood community.

Rent-to-Own: Giving People What They Want

Jamal was briefed for a few days at the corporate headquarters, and he learned the ins-and-outs of the RTO

business. He had rarely been inside one of these stores but knew they were all over the poor communities

around his hometown. The company President, a well-educated Caucasian man with an ivy league MBA, met

with him for an hour and discussed the importance of having African American managers and employees

in stores where they were the majority of residents. He told Jamal that the services provided to less

affluent consumers were important because no one else was willing to provide them. He noted that the

prices seemed higher when compared to retailers like Sears and Best Buy, but those retailers were not in

the lower socioeconomic communities – they were! Customers didn’t have to take several buses or pay

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delivery charges to visit retailers in other communities to buy products they could buy down the street from

their homes. Furthermore, they could count on the RTO shops to support them by delivering and installing

products, and even repairing or replacing items as needed.

He presented what seemed like a solid and ethical strategy: give people what they want where they live.

The RTO business didn’t require extensive credit applications and they didn’t force customers into debt for

purchases. Although Jamal appreciated that the RTO business was providing products that people wanted, it

bothered him that even the President was clear that the prices were significantly higher than at other outlets.

After the meeting, Jamal went online and read a number of articles in the press on how this thing operated

at RTO businesses. Customers who could not afford large-screen televisions or sound systems could rent

them by the week for 10, 20, or 30 dollars and keep using them as long as they continued to make regular

payments. Over a prescribed number of weeks, months, and even years, they accumulated “credit” towards

purchase, with two questionable considerations. First, if they failed to make a single payment for any reason,

their products would be repossessed and they started their rental contract and credit accumulation all over

again. Second, the total amount paid over time was sometimes double or triple what the same item cost at

a traditional retailer. Although it seemed like a viable “pay as you go” option for poor customers who wanted

the cache and comfort of owning new appliances, furniture, and electronics, Jamal wondered what cost they

were really paying.

Jamal did some calculations he remembered from his finance classes, and he discovered that the implied

interest rates were between 100% and 250%, an issue that had been viewed as “usurious” by several

state attorneys general over the last two decades. RTO lobbyists admitted that their prices were higher

but suggested that this differential was due to contingencies of working in communities that often failed

to have good credit or failed to pay on a regular basis. Furthermore, the RTO businesses were the only

retailers investing in these neighborhoods. Jamal remembered from his economics class: If there was more

competition, the prices might be lower. Also, lobbyists and RTO businesses noted that, if their customers feel

the prices are too high, they are free to go elsewhere. The fact that they continue to buy is proof that RTO is

a valuable service for people who cannot typically acquire these things.

Jamal decided to visit each of his stores, spending the better part of a full working day per outlet, to see how

the RTO business was in action. Jamal was generally impressed with how the workers interacted with the

local customers. They were friendly and helpful, explaining how small payments could amount to ownership

over time. He examined the sales logs and noticed that less than 25% of renters made it all the way to

ownership, yet the majority of contracts were for several months. Did it mean that people gave up along the

way for good reasons, or that something happened along the way that kept them from making one or more

payments? Jamal charted a small sample of longer-term customers to see how their paths to ownership got

disrupted. He found several examples of people who had items for extended periods of time, only to default

and start all over again with the same exact commodity. It seemed like they were paying for it twice or more.

Although the customer service and operations at most of his stores seemed harmonious, at two of his

five stores, Jamal witnessed disturbing scenes where former customers came in and confronted the store

managers. While miles apart, their anger stemmed from the same problem. They were a day or two late

on their payments, and someone from the store had gone to their residences and removed merchandise

without warning. In both cases, only children were home, and they were scared when they opened the door

and watched large men enter and exit with their prized possessions. The store managers explained that the

customer had signed contracts that stated unpaid bills would result in confiscation of rented items, and thus

their products had been repossessed when a payment was missed. The managers also explained that, if the

customers paid their bills on the spot, their products would be returned to them. Although one customer paid

her bill and left with her computer, the other customer stormed out, slamming the door on the way. Jamal

asked these managers if this type of exchange was common practice, and they stated that it was the only

way to protect merchandise and assure that bills were paid over time. They also noted that it made the stores

more profitable to re-rent the same things over and over again to the same people.

Ethics: Balancing Individual, Business, and Community Needs

Jamal went back to his newly rented apartment around the corner from his mother, and he decided to

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reconsider his situation. Personally, it was wonderful to be back near family and friends, and he was now able

to look in on his mother almost every day. Old friends had already stopped by, and his brothers planned to

have him over for Sunday dinners. He reconnected with a girlfriend from his past, and they rekindled their

romance with an eye to the future. Jamal had no idea where all of this would lead him, but it was nice to be

among people he cared about and who cared about him. He even thought about becoming a big brother to

give back to the community. This felt like home and he was determined to stay.

However, he could not shake the feeling that the RTO business was unethical. True, they provided services

and goods that other retailers did not. But at what price? Were they exploiting the hopes and dreams of

poor customers who were tantalized with unaffordable items made affordable at usurious rates? It seemed

like the typical “buyer” was a poor, working parent who wanted to give their families what they perceived

others to have. Given the lack of steady employment and below living wage incomes, many would eventually

default and start all over again towards purchase. Could that tactic be justified? The community members

who worked at the stores and earned good incomes thought so, especially when their bonuses kicked in at

the end of the year. That bonus and his annual salary would allow him to stay in the community he loved.

Jamal decided to speak with the regional manager about what his options were relative to his observations

of the good and the bad in the RTO business. He asked his manager a host of questions, including: Who

determined the weekly prices for these items and the number of payments prior to purchase? Was there any

flexibility around the problem of default, such as “forgiveness” for the first instance if no others occurred?

The manager listened carefully and nodded regularly to suggest his concern and agreement. However, he

stated that company regulations required strict adherence to all such policies after years of refinement and

interactions with thousands of customers. The prices were set by the district to reflect what the market could

bear and perceived problems associated with defaults. Jamal’s manager pointed out that, while Jamal was

focusing on the few isolated cases, he did not seem to realize that many people failed to treat merchandise

with the respect necessary to keep it in working condition over time – a source of sunk cost to the firm. Finally,

his manager conceded that Jamal could experiment with more flexible treatment of defaulters, but it was likely

that his stores would be less profitable and bonuses would be lower.

Jamal finally began to understand the complexity of his situation. His personal situation was important to him.

After 10 years away, he wanted to be in his community for his benefit and for the benefit of his family and

friends. The other employees were important as well as his own career and remuneration. He wondered if

changing the policies that hurt one stakeholder but helped another, such as the default policies, would be

ethical. It seemed like someone suffered at someone else’s gain. Also, he wondered why he should stand up

for customers who violated the contracts they signed. They chose to shop in the RTO stores, and if the rules

were carefully covered – and Jamal would make sure that they were – then shouldn’t people be accountable

for their actions? But what about people who experienced situations outside their control, like income earners

who fell ill and defaulted on payments because they had no sick or annual leave? Should he make such

exceptions? Was this fair to other customers who had different reasons for defaulting? Jamal had much to

consider before he could take any action. He wanted to balance his needs with those of his community and

his business. How could he decide what the right things to do were?

Discussion Questions

• 1.

Is it appropriate for Jamal to allow his own self-interests to guide his ethical conduct? For example,

charging prices and following procedures that disadvantage customers but put more money in his

pocket (and the pockets of his employees) may be viewed as wrong. Do you agree or disagree?

• 2.

Are Jamal’s responsibilities to the community different because he shares their history? Many

leaders are asked to “speak” for their communities when they are around people who are different

from them. Is this expectation fair, and does it have ethical implications?

• 3.

If Jamal truly wants to stay in this community and pursue his career, should he be willing to

take a less well-paying job with depressed future options to solve his ethical crisis? Under what

circumstance would such extreme measures make sense?

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