Alternative Financial Services Research Articles

Banks on a plane: The possibilities and limits of spatial accessibility measures for understanding geographies of financial exclusion

This paper examines how the underlying assumptions of geospatial accessibility metrics impact their representation of social and spatial relations and how these assumptions ultimately produce differing understandings of financial exclusion and its geographies. As increasing scholarly and public attention has been paid to the role of policy and institutions in (re)producing racial inequality in the United States, the role of the financial and banking system has taken on a particular importance. While conventional banking services offer the foundations of economic opportunity through savings and credit, these institutions have rarely been spatially uniform in their distribution or equally available to all classes of people. Instead, the growth of alternative financial services (or AFS) has sought to target those left out of the conventional banking system, offering higher interest and often predatory lines of credit to already marginalized people and communities. In order to examine financial exclusion and its geographies, this paper maps both banks and AFS in the Atlanta metropolitan region using five different methods for measuring spatial accessibility. Ultimately, while each of these five methods reveals a bifurcated pattern of financial exclusion across the metro where wealthier, whiter areas have higher access to banks and lower access to AFS and poorer, predominantly Black areas have relatively little access to banks and higher concentrations of AFS, each method produces a somewhat different picture of this process and its geography, calling attention to the role that such metrics play in shaping our collective understandings of racial inequality and how it to address it.

Census Tract and Neighborhood Racial Change and the Locational Decisions of Financial Services in Metro Detroit

Scholarship on the geography of US retail financial services consistently finds racialized patterns in the locations of traditional (e.g. banks, credit unions) and higher-cost or alternative (e.g. payday lenders, check cashers) financial services. While scholars tend to offer explanations based on spatial void and market segmentation hypotheses, we theorize these racialized patterns as consistent with a social reproduction of investment and divestment. We use a novel, longitudinal dataset that follows census tract- and neighborhood-level changes in racial demographics and financial services in Detroit during the pre- and post-Recession periods. Changes in the locations of financial services follow changes in racial demographics, which occur in addition to the well-documented practice of targeting or avoiding tracts and neighborhoods based on their racial majority. These racialized patterns are heightened in the post-Great Recession period.

Inequality in high-cost borrowing and unemployment insurance generosity in US states during the COVID-19 pandemic.

US consumers may turn to the private market for credit when income and government benefits fall short. The most vulnerable consumers have access only to the highest-cost loans. Prior research on trade-offs of credit with government welfare support cannot distinguish between distinct forms of unsecured credit due to data limitations. Here we provide insight on credit-welfare state trade-offs vis-à-vis unemployment insurance generosity by leveraging a large sample of credit data that allow us to separate credit cards, personal loans and alternative financial services loans and to analyse heterogeneity in credit use by household income. We find that more generous state unemployment insurance benefits were associated with a lower probability of high-cost credit use during the first seven quarters of the coronavirus disease 2019 (COVID-19) pandemic. This inverse association was concentrated among consumers living in low-income households. Our results support theories that public benefits are inversely associated with the use of costly credit.

Understanding the factors behind racial and ethnic disparities in the adoption of alternative financial services: a decomposition analysis

PurposeThe purpose of this study was to examine racial/ethnic differences in AFS use and their contributing factors using a decomposition analysis.Design/methodology/approachThe 2018 National Financial Capability Study dataset was used to analyze the four major types of AFS—title loans, payday loans, pawnshops, and rent-to-own (RTO) stores—as proxies for AFS use. The study conducted both logistic regression analysis and decomposition analysis to examine the contributing factors.FindingsThe results of the logistic regression analysis demonstrated significant disparities in the use of alternative financial services (AFS) among racial and ethnic groups. Specifically, it was found that Blacks were more likely to utilize title and payday loans, pawnshops, and rent-to-own (RTO) stores compared to Whites. In contrast, Hispanics and Asians/individuals of other ethnicities were less likely to use title loans, but Hispanics were more likely to opt for payday loans over Whites. Furthermore, objective financial literacy exhibited a negative association with the likelihood of using these four types of AFS, whereas subjective financial literacy consistently showed a positive association. When examining the decomposition analyses, it became evident that both objective and subjective financial literacy played significant roles in explaining the racial and ethnic disparities in AFS usage. However, the patterns varied in three specific pairwise comparisons.Originality/valueThis study revealed the relative contributions of each factor to the racial/ethnic disparities through decomposition analysis. Our Fairlie decomposition approach addressed non-linearities within the decomposition framework, particularly in estimating the probabilities of AFS utilization, given its binary outcomes. This extension builds upon the Oaxaca decomposition. The study offers valuable insights into the variations in AFS use among different racial and ethnic groups.

Sexual Orientation and Financial Well-Being in the United States

We study the relationship between financial well-being and sexual orientation in the United States using Survey of Household Economics and Decisionmaking (SHED) data for 2019-2022. We document that people who are lesbian, gay, and bisexual (or LGB) have significantly more difficulty managing financially than similarly situated heterosexual individuals—and this pre-dated the COVID-19 pandemic. Differences are found across a broad array of current and future financial well-being outcomes, including retirement savings, rainy-day funds, credit card and schooling debts, and the use of alternative financial services such as payday loans. Differences in partnership, financial assistance from parents, financial knowledge, and risk preferences cannot explain these differences. Instead, we document that some social vulnerabilities such as exposure to discriminatory behavior and violence are differentially experienced by LGB people, which may play a role. Our results demonstrate that people who are lesbian, gay, and bisexual experience significantly more financial insecurity than previously understood.

Financial Safety Nets or Rescue Fantasies? A Moderating View of the Relationship between Usage of Alternative Financial Services and Financial Anxiety among College Students

Financial Safety Nets or Rescue Fantasies? A Moderating View of the Relationship between Usage of Alternative Financial Services and Financial Anxiety among College Students

Law and order? Associations between payday lending prohibition and alternative financial services use by degree of enforcement

AbstractSixteen jurisdictions in the United States prohibit payday lending through stringent usury laws or well‐established nonprofitable 36% interest rate caps. Yet over one in 10 consumers residing in these jurisdictions borrowed payday loans in the past 5 years. This raises questions about actual policy implementation and enforcement. We employ data from the 2018 National Financial Capability Study to investigate if associations between payday lending prohibitions and payday borrowing differ by degree of enforcement. We find that nuances in degree of enforcement among restrictive states are not associated with payday borrowing likelihoods. However, these nuances appear when examining payday borrowing frequency, particularly when controlling for consumers' financial circumstances and when conditioning on alternative financial services consumers. We consistently note the highest borrowing behaviors for states sans regulation. Policymakers may consider strengthening enforcement in cases where the primary goal is preventing or reducing payday borrowing.

Prepaid cards and the unbanked in the U.S.: financial innovations and financial inclusion

PurposeFinancial inclusion is measured by the number of people who use the formal financial system and banks in particular. Limited access to formal banking services and the existence of unbanked households is a main policy concern. The authors evaluate how the use of prepaid (reloadable) debit cards by unbanked households affects financial inclusion and specifically the potential for these households to participate in the formal financial system and open a bank account.Design/methodology/approachThe authors apply matching models to analyze survey data from the Federal Deposit Insurance Corporation National Survey of the Unbanked and Underbanked Households from 2009 to 2019 and evaluate how prepaid cards use affects plans to open a bank account.FindingsUnbanked households who use prepaid cards are 5% less likely to open a bank account compared to the matched nonusers of prepaid cards. In addition, prepaid card users are 12% more likely to use nonbanks to transfer money/transact online and 18% more likely to have obtained loans from alternative financial services providers compared to the matched unbanked nonusers of prepaid debit cards.Originality/valueNo previous work has estimated the causal impact of use of prepaid cards on financial inclusion.

Heterogeneous unbanked households: Which types of households are more (or less) likely to open a bank account?

Promoting bank account ownership is important because having a bank account is the foundation for households’ financial well-being. Unbanked households differ in their likelihood of opening a bank account, and understanding the factors associated with these differences can help policymakers and industry stakeholders to tailor financial inclusion strategies. This study examines which factors are associated with unbanked households that are more (or less) likely to open a bank account. We use data from the FDIC National Surveys of Unbanked and Underbanked Households and assess the likelihoods of opening a bank account for different groups of unbanked households divided based on their prior banking status and interest in having a bank account. Unbanked households that previously had a bank account and are interested in having a bank account are more likely to open an account. These households tend to be unemployed, more educated, and native born, to have access to digital technologies, to use alternative financial services, and to be unbanked because of unfavorable bank account features. In contrast, households that never had a bank account and are uninterested in a bank account are less likely to open an account. These households tend to be not in the labor force, less educated, of a racial minority, and foreign born, to lack access to digital technologies, and to rely heavily on cash. Moreover, they tend to distrust banks. Advancing financial inclusion for this group will require strategies to increase their trust in the financial services industry.

Financial stressors and alternative financial service use: Extending the ABC‐X model of family stress

AbstractThie study's purpose was to examine factors associated with alternative financial service (AFS) use among US consumers. The conceptual framework for this study was developed from the ABC‐X model of family stress with the purpose of identifying the interrelationships among financial stressors, economic hardship, negative credit experiences, and the use of AFS. Using the U.S. National Financial Well‐Being Survey and the structural equation modeling method, the results showed that financial stressor was not directly related to AFS use but were through two indirect routes: the financial stressor was positively linked to negative credit experience and then to AFS use; the financial stressor was positively linked to economic hardship, to negative credit experience, and then to AFS use. Economic hardship was positively associated with consumers' negative credit experiences. Negative credit experience was positively associated with the use of alternative financial services. The findings provide theoretical and practical implications.

Financial inclusion, financial capability and financial fragility during COVID-19 pandemic

PurposeFinancial inclusion can be proxied by banking status. The purpose of this study is to investigate the potential effects of financial capability on the financial fragility of US adults with various banking statuses during the COVID-19 pandemic.Design/methodology/approachThis study utilized the 2021 National Financial Capability Study (NFCS) dataset to investigate the relationship between financial capability and financial fragility among consumers with different banking statuses. The analysis controlled for employment shocks, health shocks and other consumer characteristics. Banking statuses included fully banked, under-banked (utilizing both banking and alternative financial services) and unbanked individuals. Logistic regression analyses were conducted on both the entire sample and subsamples based on banking statuses.FindingsThe results showed that financial capability was negatively associated with financial fragility. The magnitude of the potential negative effect of financial capability was the greatest among the fully banked group, followed by the underbanked and unbanked groups. Respondents who were underbanked or unbanked were more likely to experience financial fragility than those who were fully banked. Additionally, respondents who were laid off or furloughed during the pandemic were more likely to experience financial fragility than those without employment shocks. The effect size of financial capability factors was greater than that of COVID-19 shock factors. These results suggest that higher levels of both financial capability and financial inclusion may be effective in reducing the risk of financial fragility.Originality/valueThis study represents one of the first attempts to examine the potential effects of financial capability on financial fragility among consumers with various banking statuses during the COVID-19 pandemic. Furthermore, this study offers new evidence to determine whether COVID-19 shocks, as measured by health and employment status, are associated with financial fragility. Additionally, the effect size of financial capability factors is greater than that of COVID-19 shock factors. The results from the 2021 NFCS dataset provide valuable insights for banking professionals and public policymakers on how to enhance consumer financial wellbeing.

Risk preference, payday loans and other alternative financial services

PurposeThe purpose of this paper is to examine how individual risk preference influences the borrowing of payday loans – a prevalent type of cash loan in the USA with exorbitantly high-interest rates. Additionally, this paper tests how risk preference determines other alternative financial services (AFS), including pawn shops, rent-to-own purchases, title loans, etc.Design/methodology/approachThe author applies Probit and Tobit regressions to test the relationship between individual risk preference and payday borrowing, based on the state-by-state survey data from National Financial Capability Study (NFCS) sponsored by Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.FindingsIndividuals with higher risk tolerance are more likely to borrow payday loans and other AFS, after controlling for financial situation, financial literacy, overconfidence and demographic features.Originality/valueThis paper is the first to study risk preference as an explanation to the high cost and widely used payday loan services in the United States of America. This study provides evidence that these cash loans are determined by inherent human characteristics. The finding provides new insight for the policymakers and regulators in the consumer debt market.

Financial Literacy Overconfidence, Mobile Financial Service Use, and High-Cost Borrowing

This study provides theory and evidence on the relation between financial literacy overconfidence (FLO) and high-cost borrowing and its mediation and moderation through mobile financial services (MFS). We investigate whether MFS carry the effect of FLO on the household demand for alternative financial services (AFS), such as payday loans. Using the 2018 National Financial Capability Study, we show that using MFS both mediates and moderates the effect of FLO on the use of AFS. We find that unbanked households, who make up around 5% of the sample, are twice as likely to take out payday loans and three times as likely to use AFS than households with access to the banking system. Estimates show that 4% of the total effect of FLO on using AFS and taking out payday loans is mediated by using MFS. We find that households who use MFS are two to three times more likely to access AFS and take out payday loans than those who do not use MFS.

Exploring the relationship between investors' financial literacy and advisor use with securities‐based loans

AbstractPast literature has explored the characteristics of individuals who use high‐interest and tax‐inefficient consumer debt products, such as carrying a monthly credit card balance and engaging with alternative financial services. That literature revealed that users of these debt products tended to be financially constrained households faced with an immediate liquidity need, and that they had lower levels of financial literacy. Much less is known, however, about the role financial literacy may play when a more advantageous solution may be available but not used—an example of which is securities‐based loans, which offer lower rates and potential tax preferences. Therefore, this study used the 2018 National Financial Capability Study to examine why investors use traditional debt products when they could likely have qualified for a securities‐based loan. Using bounded rationality as a theoretical framework, this research advances the literature in consumer debt and borrowing decisions. The results found that objective knowledge, as opposed to self‐assessed ability or confidence, explained the use of optimal debt products. Additionally, advisor engagement was positively associated with securities‐based loan use.

Qualitative Investigation: Exploring the Challenges Faced by Indonesian SMEs in Accessing Financial Services in Sukabumi City

Indonesian SMEs play a crucial role in the country's economy, accounting for 99% of all businesses and employing more than 97% of the workforce. However, SMEs often face challenges in accessing financial services, hindering their growth and development. This study explored the challenges Indonesian SMEs face in accessing financial services in Sukabumi City, West Java. A qualitative research approach was employed, and data was collected through interviews and focus group discussions with 20 SME owners. The study's results identified several challenges and barriers SMEs face, including limited financial literacy and knowledge, limited access to formal financial services, high cost of financial services, and limited availability of appropriate financial products. To address these challenges, the study proposed several potential solutions, including financial education and literacy programs, reduced collateral requirements, the introduction of alternative financial services, improved availability of financial products, and government support. These solutions could help Indonesian SMEs in Sukabumi City access the financial assistance they need to grow and expand their businesses, contributing to the overall development of the country's economy.

The Need for Speed: Demand, Regulation, and Welfare on the Margin of Alternative Financial Services

Abstract We use a nonlinear reduction in a bank's check-cashing fees and variation in regulated check-clearing times to identify the elasticity of demand for cashing checks rather than depositing them. We find that an extra day of check-clearing time makes account holders 65.5% more likely to cash a check than deposit it, which implies they are willing to pay $11.17 per day for faster access to their funds – an effective annualized discount rate of 11,054% for the average check. We use this elasticity to evaluate recent proposals that mandate faster check-clearing times.

The Effects of State Consumer Protection Policies During the Pandemic on the Use of Alternative Financial Services Loans

The Effects of State Consumer Protection Policies During the Pandemic on the Use of Alternative Financial Services Loans

Digital accessibility in the context of preference for financial services

The paper addresses the question of how digital access is related to the preference for financial services. The purpose of the research was to reveal the main types of interrelationships between digital and financial access by dividing and comparing countries with different corresponding characteristics. The research hypothesis suggested a negative correlation would exist between digital access and penetration of traditional financial services. To test this hypothesis, data from countries with advanced and developing markets were analyzed. The share of the population with Internet access was used as an indicator of digital access. To evaluate the availability of financial services, the IMF financial access index was considered. The countries were ranked by the level of digital and financial access, which allowed them to be divided into four groups according four sub-hypotheses: low financial and high digital penetration, high digital and financial penetration, low digital and high financial penetration, and low digital and financial penetration. The correlation analysis of the obtained data revealed a weak negative relationship between digital and financial access for each of the groups, and confirmed the tested hypotheses. It was concluded that digital access by itself is not a driver for expanding the availability of financial services, but it can contribute to innovative financial development through the formation of alternative financial services. This research contributes to the understanding of the ambiguous relationship between digital and financial access and, ultimately, to the criticism of the optimistic perception of digital finance, which has practical significance for financial regulation.

Is Ignorance Bliss? Use of Alternative Financial Services, Financial Knowledge, and Financial Anxiety

Is Ignorance Bliss? Use of Alternative Financial Services, Financial Knowledge, and Financial Anxiety

Decentralized Finance (DeFi) Projects: A Study of Key Performance Indicators in Terms of DeFi Protocols’ Valuations

Decentralized finance (DeFi) protocols use blockchain-based tools to mimic banking, investment and trading solutions and provide a viable framework that creates incentives and conditions for the development of an alternative financial services market. In this respect, they can be seen as alternative financial vehicles that mitigate portfolio risk, which is particularly important at a time of increasing uncertainty in financial markets. In particular, some DeFi protocols offer an automated, low-risk way to generate returns through a “delta-neutral” trading strategy that reduces volatility. The main financial operations of DeFi protocols are implemented using appropriate algorithms, but unlike traditional finance, where issues of value and valuation are commonplace, DeFis lack a similar value-based analysis. The aim of this study is to evaluate relevant DeFi performance metrics related to the valuations of these protocols through a thorough analysis based on various scientific methods and to show what influences the valuations of these protocols. More specifically, the study identifies how DeFi protocol valuations depend on the total value locked and other performance variables, such as protocol revenue, total revenue, gross merchandise volume and inflation factor, and assesses these relationships. The study analyzes the valuations of 30 selected protocols representing three different classes of DeFi (i.e., decentralized exchanges, lending protocols and asset management) in relation to their respective performance measures. The analysis presented in the article is quantitative in nature and relies on Granger causality tests as well as the results of a fixed effects panel regression model. The results show that the valuations of DeFi protocols depend to some extent on the performance measures of these protocols under study, although the magnitude of the relationships and their directions differ for the different variables. The Granger causality test could not confirm that future DeFi protocol valuations can be effectively predicted by the TVLs of these protocols, while other directions of causality (one-way and two-way) were confirmed, e.g., a two-way causal relationship between DeFi protocol valuations and gross merchandise volume, which turned out to be the only variable that Granger-causes future DeFi protocol valuations.