Alternative financial service

Not to be confused with Alternative finance.

An alternative financial service (AFS) is a financial service provided outside traditional banking institutions, on which many low-income individuals depend.^[1][2] In developing countries, these services often take the form of microfinance.^[3] 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.^[4] 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.^[5]

A shop window in Falls Church, Virginia.

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.

United States

Lendmark Financial Services in Chattanooga, Tennessee

Alternative financial services in the United States,^[1][2] 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 counter parties in many other countries.

Americans that use non-traditional lenders to meet short-term financial needs include almost ten million households that are unbanked or underbanked, according to a 2004 study prepared for The Fannie Mae Foundation by the Urban Institute Metropolitan Housing and Communities Policy Center, "Alternative Financial Service Providers." The study states that a vast majority of borrowers who utilize small-dollar online loans like payday loans tend to use them for regular, recurring expenses as opposed to unexpected financial emergencies. Many borrowers who take advantage of such subprime lending options tend to have low credit scores or limited credit backgrounds, and a vast majority of those who utilize alternative loans online like payday loans tend earn an annual income of $40,000 or less.^[6]

United Kingdom

In the United Kingdom, alternative financial services include payday loans and money lending, the latter termed "home collected credit", "home credit" or "doorstep loans". Organizations such as Debt on our Doorstep campaign for improved regulation.

Canada

In Canada, alternative financial services include payday loans and money lending. They are regulated according to each province. Many lenders use Instant Bank Verification (IBV),^[7] more than credit check to verify eligibility.

See also

• Community Financial Services Association of America
• Debt bondage
• Debt of developing countries
• Guarantor loan
• Informal value transfer system
• Loan shark
• Mortgage discrimination
• Overdraft protection loans
• Payday loan
• Poverty industry
• Refund anticipation loan
• Sarakin
• Securitization
• Settlement (finance)
• Title loan
• Underbanked
• Usury