Association for Public Policy Analysis & Management

“Financial inclusion” has become a hot topic among researchers, policy makers and the media. In 2011, FDIC reported that more than one in four households, or twenty-eight percent of Americans, are “unbanked” (they have no bank account) or “underbanked” (they have bank accounts but continue to rely on alternative financial services). The numbers are more stark in low-income areas, and among racial and ethnic minorities.

The purpose of this paper is to address the following question:  Why, banks are the best way for people to manage their finances, do people increasingly choose to use ‘informal’ and ‘alternative’ financial services (AFS) instead of, or in addition to, mainstream financial institutions. Such understanding is critical because policy makers are convinced that banks are the best way for all people to meet their financial needs.

Policy makers and researchers tend to believe that the large and growing use of alternative financial services stems from a lack of financial literacy among AFS users.  We argue that AFS users’ choices are often driven by logic and experience.

The primary methodology for this paper is embedded ethnography. The author spent hundreds of hours embedded as a teller at RiteCheck, a check casher in the South Bronx, and as a teller and loan collector at Check Center in downtown Oakland, California.  She also staffed the Predatory Loan Help Hotline, a service run by the Virginia Poverty Law Center for people experiencing trouble repaying their payday loans. After working at each of these businesses, both authors interviewed fifty customers at each store.  For one month, Servon volunteered as a staffer on a hotline for people having difficulty repaying their payday loans. She conducted a range of interviews with experts on banking and alternative financial services, policy makers at the Consumer Finance Protection Bureau and the FDIC, relevant researchers, the head of a subprime credit bureau, and consumer advocates.  Servon also attended local and national trade association meetings of check cashers and payday lenders, and conferences run by the Center for Financial Services Innovation. Finally, the paper relies on a deep literature and policy review that informs a discussion of trends underlying the dysfunctional financial services landscape. 

Although research and the media tend to depict AFS providers as predatory and abusive, we find that people use AFS for three primary reasons: cost, transparency, and trust.  This work has important implications for policy.  We also argue that the dichotomous “inclusion/exclusion” and “banked/unbanked” frames are not useful, as they fail to reflect the complexity of the consumer financial services industry and the way people use it.  Policy, we argue, must begin from a more fine-grained understanding of how and why people use alternative and informal financial services.