The number of Americans using alternative financial services is on the rise.
The most recent survey by the Federal Deposit Insurance Corporation (FDIC) reveals surprising statistics on just how many Americans choose to have little to no financial relationships with traditional banking institutions, choosing instead to patronize alternative financial services or AFS.
Data from the FDIC survey now estimates that around 10 million Americans, or 8.2 percent of households in the United States, are unbanked, meaning no one in the household has a checking or savings account.
On top of this number, around 20.1 percent, or one in five American households, are considered “underbanked”, the term used to classify those who own a checking or savings account but still use AFS.
What Are Alternative Financial Services?
AFS products and services commonly used by the unbanked and underbanked include pawn shops, payday loan providers, check cashing services, refund anticipation loans, non-bank remittances, or prepaid credit or debit cards.
Why do people use Alternative Financial Services?
As an increasing number of people become either disenfranchised or wary of banks and financial institutions, these alternative service providers are filling the need for people to still make electronic transactions like online payments.
Customers give varying reasons for foregoing checking or savings accounts, but one common perception is that checking accounts require a lot of money to either open or maintain. According to Keith Ernst, FDIC’s associate director of depositor and consumer protection, “The No. 1 reason why they don’t have an account is they say they don’t have enough money.”
Alternative Financial Services Are Expensive
Despite the seemingly more cost-effective nature of these AFS solutions, however, they are not really better than the usual fees and costs that go with regular checking accounts or credit/debit cards.
For instance, a minimum-wage earner might opt to use check-cashing services every payday (usually twice a month) instead of opening a checking account and enrolling in direct deposit.
Depending on the location, check cashing can cost up to 2% of each check being cashed, running up to a couple hundred dollars a year. Compared to a $10 a month checking account and generally free direct deposit enrollment, check cashing services are not a better alternative.
Alternative Financial Services may be easier…
Even the costs incurred when using other AFS products are not necessarily cheaper, although they might be easier for those with poor credit history or who are barred from opening checking accounts or credit cards because of credit issues.
Alternative Financial Services Fees
Postal money orders average $1.15 each. Fees for prepaid credit and debit cards typically have monthly fees; some even charge the user every time the card is reloaded, or even for customer service calls or balance inquiries.
Traditional Bank Fees
For many, however, just the thought of $35 overdraft fees, maintaining monthly amounts, recurring card fees, ATM transaction fees, and other usual bank charges are enough to steer clear and to opt for the alternative products instead.
Add to this the lingering distrust of the financial industry as a whole, with the recession still being felt by most people and the banks being seen as the culprit behind it.
Alternative financial services exist because there is a demand for it, but I believe that demand would decline if people truly understood the aggregate annual costs of using such a service.