Use Of Alternative Financial Services Research Articles

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.

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.

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

Credit record overconfidence and alternative financial service use

PurposeThe purpose of this paper is to study the effect of credit record overconfidence on the use of alternative financial services (AFSs).Design/methodology/approachUsing data from the 2018 National Financial Capability Study (NFCS), the authors estimate logistic regressions on the use of at least one AFS by adding a credit record confidence variable that captures deviations between self-assessments of credit record management and the number of reported behaviors that would negatively affect aspects of a Fair Isaac Corporation (FICO) score.FindingsThe authors find that respondents with credit record overconfidence have over two times higher odds (123.9%) of using AFS than the odds of respondents with financial knowledge overconfidence (46.8%), relative to their reference categories. When compared directly, those with only credit record overconfidence have 32.6% higher odds of using AFS than those with only financial knowledge overconfidence.Practical implicationsThe results provide implications for education programs, not only for vulnerable groups at higher risk for AFS use but also for those with cognitive biases, such as credit record overconfidence. Potential solutions include personal financial education that includes debiasing and behavioral techniques for overconfidence.Originality/valueThis paper studies, for the first time, the effect of deviations between actual and perceived credit record management on AFS use.

Bank Account Access Methods, Household Financial Well-Being, and Alternative Financial Services

ABSTRACT This study examines US household methods used to access their bank account, and implications for the use of Alternative Financial Services (AFS) and financial well-being. Latent class analysis and multinomial logistic regression were conducted. Results indicated that 7.7% of households are very likely to access their account through a bank teller (Bank Teller Access Method), 25% are very likely to use all types of technology (All Technology Access Method), 33.5% use all types of access methods but not their smartphone (Traditional Technology Access Method), and 33.8% use all methods (All Modes Access Method). Access method is associated with AFS use.

Exploring Racial/Ethnic Disparities in the Use of Alternative Financial Services: The Moderating Role of Financial Knowledge

Using the 2015 National Financial Capability Study dataset, this study examined the association between race/ethnicity and the use of alternative financial services (AFS) with the moderating role of financial knowledge. Results showed that blacks were more likely to use payday loans, pawnshops and rent-to-own stores than whites. Further, Hispanics were more likely to use payday loans and pawnshops, while Asians/others were more likely to use payday loans compared to whites. The level of financial knowledge influenced different types of AFS use among racial/ethnic groups in a different way with a stronger moderating effect of financial knowledge on blacks and Hispanics than for whites. This study supports the important role of financial knowledge, especially for minority groups that need further attention for researchers.

Impact of Financial Education Mandates on Younger Consumers' Use of Alternative Financial Services

Over one‐quarter of American adults used credit‐based alternative financial services (AFS) in the past five years, which carry a typical APR of 300%. Young adults are especially more likely to use AFS yet are also more likely to be exposed to personal finance education in schools. In this study, I use data from pooled 2012 and 2015 waves of National Financial Capability Study to examine whether state‐mandated financial education impacts young adults' use of AFS. I find that financial education mandates significantly reduced the likelihood and frequency of payday borrowing in particular. Additionally, I show that exposure to required personal finance courses could affect payday borrowing through increased financial literacy and improved financial planning practices. These findings suggest that policymakers and other stakeholders need to understand the full benefits of financial education when making cost–benefit analysis comparisons as to whether or not to implement.

Unbanked status and use of alternative financial services among minority populations.

A large number of Americans do not have bank accounts (the 'unbanked') or rely on costly alternative financial services (AFS) such as payday loans (the 'underbanked'), with implications for wealth accumulation and retirement preparedness. Using primary data, we document large racial/ethnic differences in unbanked and in frequent AFS usage rates. We study the role of socio-economic status (SES), financial literacy, trust in financial institutions, networks, and time preferences in explaining these gaps. While these variables explain a large fraction of the white-minority gaps in unbanked status the same is not true for gaps in AFS use. A Blinder-Oaxaca decomposition confirms these patterns: gaps in unbanked status are mostly explained by differences in endowments across groups, for AFS gaps differences in returns to endowments have the largest explanatory power. Our findings suggest that, while related, unbanked and underbanked are distinct concepts with different underlying causes that may require different policy responses.

Living outside the Financial Mainstream: Alternative Financial Service Use among People with Disabilities

ABSTRACT This study explored factors related to the use of alternative financial services (i.e., payday loans, prepaid debit cards, pawn shops, auto title lenders, and rent-to-own stores) among a nationally representative sample of U.S. adults (N1 = 27,564), and a sub-sample of people with disabilities (PWDs) (N2 = 1,232). Using secondary data from the Financial Industry Regulation Authority’s 2015 National Financial Capabilities Study (NFCS), two separate logistic regression models revealed several significant individual and institutional level factors that predicted alternative financial service use among both samples. The full-sample model was found to be significant, χ2(10) = 3,917.22, p < .001, as was the sub-sample model, χ2(10) = 193.43, p < .001. Additionally, it was found that PWDs were twice as likely to use alterative financial services than people without disabilities. Further research is recommended to empirically explore the consequences of alternative financial service use among PWDs. Implications of this study are targeted toward social work researchers, policy makers, and human service practitioners.

Impact of Financial Education Mandates on Younger Consumerss Use of Alternative Financial Services

Over one-quarter of American adults used credit-based alternative financial services (AFS) in the past five years, which carry a typical APR of 300 percent. Young adults are especially more likely to use AFS yet are also more likely to be exposed to personal finance education in schools. In this study, I use data from pooled 2012 and 2015 waves of National Financial Capability Study to examine whether state-mandated financial education impacts young adults’ use of AFS. I find that financial education mandates significantly reduced the likelihood and frequency of payday borrowing in particular. Additionally, I show that exposure to required personal finance courses could affect payday borrowing through increased financial literacy and improved financial planning practices. These findings suggest that policymakers and other stakeholders need to understand the full benefits of financial education when making cost-benefit analysis comparisons as to whether or not to implement.

Household Financial Access and Use of Alternative Financial Services in the U.S.: Two Sides of the Same Coin?

Financial access, or the household use of formal financial services, includes the ability to access transaction, credit, and investment products and services from formal financial institutions. In contrast, households that use Alternative Financial Services (AFS), or products and services from non-bank sources, lack full financial access and are considered financially excluded. Financial access is a necessary component of strong household financial well-being. Some researchers discuss the two as opposite sides of the same construct, or “two sides of the same coin” because they are closely related features of one idea. Using national data from the 2015 Financial Capability Study (n = 27,564), this study sought to explore the nature of the relationship between financial access and AFS use using confirmatory factor analysis. Results suggest that the two concepts are weakly and positively related, which suggests that they are not “two sides of the same coin”. The determinates of AFS use are complex, and may include social factors. A holistic approach to expanding financial access may be most effective. Policy implications are also discussed.

Effects of a Tax‐Time Savings Intervention on Use of Alternative Financial Services among Lower‐Income Households

Alternative financial services (AFS) such as check cashing and payday loans may help unbanked households meet transaction and credit needs, yet often at a very high price. Saving tax refunds can help low‐ and moderate‐income (LMI) households build emergency savings as a way to reduce dependence on AFS and cope effectively with irregular cash flows and financial shocks. This study examined the impact on AFS use of message‐based interventions encouraging LMI households to save their refunds when they electronically filed their federal income tax returns. We found that 3 out of 18 interventions resulted in statistically significant reductions in credit‐related AFS use with small effect sizes. None of the interventions resulted in reduced transaction‐related AFS use. Other factors—especially prior AFS use and financial shocks—were strong predictors of AFS. Financially vulnerable households may need additional opportunities and protections to reduce dependence on AFS.

Comparing Military and Civilian Household Finances: Descriptive Evidence from Recent Surveys

Despite significant media and policy attention to the financial conditions of military and civilian households in American over the past few years, little is known about their relative standing and decision making. Using data from large national surveys, this analysis provides descriptive evidence on key differences for comparable young, low‐moderate income and education military and civilian respondents. I find that military members have more types of savings accounts, more problematic credit card behaviors, and equivalent use of alternative financial services. I briefly discuss directions for future research and some policy implications.

Bounded Rationality and Use of Alternative Financial Services

The increasing pervasiveness of high‐cost alternative financial services (AFS) has captured the attention of policymakers, consumer educators, and financial counselors. Using data from the 2009 to 2012 waves of the National Financial Capability Study (NFCS), this article investigates AFS borrowing behaviors through the lens of a boundedly rational choice framework, with an emphasis on overconfidence. Through repeated testing of isolated samples of individuals with characteristics that make them less likely to objectively need such products, the roles of actual (objective) and perceived (subjective) financial knowledge in the decision‐making process are explored. Consistent results indicate that individuals with lower objective financial knowledge and those that are overconfident in their self‐assessed knowledge level are significantly more likely to utilize AFS instruments. These results suggest that a significant portion of AFS users may select these products without conducting adequate search, resulting in less than optimal financial decisions holding all else equal.