An alternative financial service (AFS) is a financial service provided outside traditional banking institutions, on which many low-income individuals depend. In developing countries, these services often take the form of microfinance. In developed countries, the services may be similar to those provided by banks and include payday loans, rent-to-own agreements, pawnshops, refund anticipation loans, some subprime mortgage loans and car title loans, and non-bank check cashing, money orders, and money transfers. It also includes traditional moneylending by door-to-door collection. In New York City, these are called check-cashing stores, and they are legally exempted from the 25 percent criminal usury cap.
Alternative financial services are typically provided by non-bank financial institutions, although person-to-person lending and crowd funding also play a role. These alternative financial service providers are estimated to process about 280 million transactions per year, representing roughly $78 billion in revenue. Customers include the unbanked.
Alternative financial services in the United States, for example via payday loans, are more extensive than in some other countries, because the major banks in the U.S. are less willing to lend to people with marginal credit ratings than their counterparts in many other countries.
In the United Kingdom, alternative financial services include payday loans and money lending, the latter termed “home collected credit” or “home credit”. Organizations such as Debt on our Doorstep campaign for improved regulation.
- Bradley, Christine; Burhouse, Susan;
Gratton, Heather; Miller, Rae-Ann
(2009), “Alternative Financial Services:
A Primer” , FDIC Quarterly, Federal Deposit Insurance Corporation, 3 (1), retrieved 30 May 2010
- Blank, Rebecca M. (April 16, 2008).
“Public Policies to Alter the Use of
Alternative Financial Services Among
Low-Income households” . Federal
Reserve Board Academic Consultants
Meeting on Non-traditional Financial Services, April 16, 2008. Brookings Institution. p. 1.
- https://www.nytimes.com/2016/06/11 /opinion/an-invitation-to-abuse-bycheck-cashing-stores.html?_r=0
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.