Alternative Financial Services (AFS) businesses are a major source of banking and credit services for the un- and under-banked, low-income and working poor consumers, residents of minority neighborhoods, and consumers with heavy debt burdens and less-favorable credit histories.
Often, these individuals or families are thrown for a financial loop when faced with unexpected expenses and emergencies.
AFS providers fall outside the system of traditional, federally insured financial institutions. They include check cashing and money order outlets, lenders and even retail establishments.
Unbanked and Under-banked
One in 12 of the nation’s households currently manage their finances without a bank, according to a report issued in September 2012 by the Federal Deposit Insurance Corporation. Another 24 million are under-banked. Of these households, one-quarter have used at least one AFS product in the last year.
Check Cashing and Money Orders
Check cashing outlets provide access to cash by cashing checks, such as paychecks and benefits checks, for a fee. Often, they also sell money orders or money transfers, which customers can use to pay bills. Many also offer payday loan services. In 22 states, these outlets are required to have licenses or permits.
Payday loans are small cash advances based on personal checks held by the lender for a scheduled period of time, generally either until the next payday or for a one- or two-week period. When the loan comes due, the consumer pays off the loan, renews the loan (for an additional fee) or allows the check to be deposited. Payday lending is prohibited in 23 states, while 24 states allow it if the provider is holds a license or permit.
Traditional pawns are structured as pledges, sales or “conditional sales” of the borrower’s property to the pawnbroker, subject to the right of redemption. Pawnshops were once the province of the down-and-out. Today, thanks to a number of popular reality TV shows, pawnshops are newly acceptable to many people in need of quick cash. Eighty percent of pawned items are eventually redeemed.
Increasingly, big-box stores like Kmart, Costco, Best Buy and Walmart are offering financial services, including check cashing services, prepaid credit cards and loans to make it easier for customers to buy their products.
Costco sells auto and homeowners insurance, offers credit-card processing for small businesses and home mortgages. Walmart is testing the sale of life insurance; Home Depot offers non-collateralized home improvement loans of up to $40,000; Sam’s Club sells loans backed by the Small Business Administration. The lines between traditional and alternative financial services continue to blur.
Problems with AFS
Users of AFS often pay fees that are many time higher than those charged by traditional financial institutions for the same services. In addition, AFS providers fly largely under the radar of federal regulators and offer fewer protections. The new Consumer Financial Protection Bureau is charged with creating and enforcing new rules for these services. Watch for developments.
A Consumer Lawyer Can Help
The law surrounding alternative financial services is complicated and constantly evolving as banking preferences change and retailers launch new products. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact an attorney who focuses on consumer law.