The Consolidation of the Secondary Financial Services Market

Abstract

Stagnant income and persistent debt have induced low- and middle-income households to rely on alternative financial services (AFS): buy-here-pay-here auto loans, check-cashers, payday loans, auto title loans, rent-to-own furniture and appliances, and pawnshops. A secondary financial services market has evolved to serve the secondary labor market, replete with trade associations as well as state and federal regulators. Mainstream financial institutions have marketed innovations, such as reloadable debit cards, to appeal to low- and middle-income consumers. High fees and interest rates of AFS products have fueled a volatile debate about the future of the secondary financial services market, with options including prohibition, regulation, and inclusion. A tidal wave of debt has swept over the lower economic elevations of America, not only obliterating the prosperity of poor households that had struggled with declining incomes for decades, but more recently destabilizing a large swath of middle-income families that relied on credit to bolster family finances (Edsall, 2012). The Great Recession, a dramatic reversal of the fortunes of low- and middle-income families, caused working class families to resort to Alternative Financial Services (AFS) to maximize their increasingly tenuous resources; however, as the tsunami reached higher elevations, middleincome households turned to AFS, as well. When banks and credit unions failed to respond to the needs of increasingly desperate working families, struggling households resorted to a burgeoning network of buy-here-pay-here auto sales, payday and auto title lenders, check-cashers, rent-to-own vendors, and pawnshops.