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Alternative financial service

From Wikipedia, the free encyclopedia
A shop window in Falls Church, Virginia.

An alternative financial service (AFS) is a financial service provided outside traditional banking institutions, on which many low-income individuals depend.[1][2] In developing countries, these services often take the form of microfinance.[3] In developed countries, the services may be similar to those provided by banks and include payday loans, rent-to-own agreements, pawnshops, refund anticipation loans, some subprime mortgage loans and car title loans, and non-bank check cashing, money orders, and money transfers.[4] It also includes traditional moneylending by door-to-door collection. In New York City, these are called check-cashing stores, and they are legally exempted from the 25 percent criminal usury cap.[5]

Alternative financial services are typically provided by non-bank financial institutions, although person-to-person lending and crowd funding also play a role. A 2004 report estimated that alternative financial service providers handled about 280 million transactions a year, generating roughly $78 billion in fee revenue.[6] Customers include the unbanked.

United States

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Lendmark Financial Services in Chattanooga, Tennessee

Alternative financial services in the United States,[1][2] for example via payday loans, are more extensive than in some other countries, because the major banks in the U.S. are less willing to lend to people with marginal credit ratings than their counter parties in many other countries.

Americans that use non-traditional lenders to meet short-term financial needs include almost ten million households that are unbanked or underbanked, according to a 2004 study prepared for The Fannie Mae Foundation by the Urban Institute Metropolitan Housing and Communities Policy Center, "Alternative Financial Service Providers." The study states that a vast majority of borrowers who utilize small-dollar online loans like payday loans tend to use them for regular, recurring expenses as opposed to unexpected financial emergencies. Many borrowers who take advantage of such subprime lending options tend to have low credit scores or limited credit backgrounds, and a vast majority of those who utilize alternative loans online like payday loans tend earn an annual income of $40,000 or less.[7]

United Kingdom

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In the United Kingdom, alternative financial services include payday loans and money lending, the latter termed "home collected credit", "home credit" or "doorstep loans". Organizations such as Debt on our Doorstep campaign for improved regulation.

The Financial Conduct Authority (FCA) took over regulation of consumer credit, including high-cost short-term credit, from the Office of Fair Trading on 1 April 2014.[8] From 2 January 2015 the FCA introduced a price cap on high-cost short-term credit, comprising an initial cost cap of 0.8% per day of the amount borrowed, a £15 cap on default fees, and a total cost cap of 100%, so that a borrower never repays more in interest and fees than the amount originally borrowed.[9] A 2017 review by the regulator found the cap had saved around 760,000 borrowers approximately £150 million a year, and the FCA maintained it at its existing level.[8]

Canada

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In Canada, alternative financial services include payday loans and money lending. They are regulated according to each province. Many lenders use Instant Bank Verification (IBV).

Section 347 of the Criminal Code sets a criminal rate of interest. On 1 January 2025 this was reduced from an effective annual rate of 60% to an annual percentage rate of 35%.[10] The accompanying Criminal Interest Rate Regulations provide exemptions for certain commercial, pawnbroking and payday loans.[11] Payday loans, which are regulated provincially, became subject to a federal limit on the total cost of borrowing of CA$14 per CA$100 advanced in provinces with an approved payday lending regime.[10]

See also

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References

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  1. 1 2 Bradley, Christine; Burhouse, Susan; Gratton, Heather; Miller, Rae-Ann (2009), "Alternative Financial Services: A Primer" (PDF), FDIC Quarterly, vol. 3, no. 1, Federal Deposit Insurance Corporation, retrieved November 19, 2021
  2. 1 2 Blank, Rebecca M. (April 16, 2008). "Public Policies to Alter the Use of Alternative Financial Services Among Low-Income households". Federal Reserve Board Academic Consultants Meeting on Non-traditional Financial Services. Brookings Institution. p. 1.
  3. ↑ Arp, Frithjof; Ardisa, Alvin; Ardisa, Alviani (August 2017). "Microfinance for poverty alleviation: Do transnational initiatives overlook fundamental questions of competition and intermediation?". Transnational Corporations. 24 (3). United Nations Conference on Trade and Development: 103–117. doi:10.18356/10695889-en. hdl:10419/170696. S2CID 73558727. UNCTAD/DIAE/IA/2017D4A8.
  4. ↑ Chatterjee, Swarn; Chang, Yunhee (2025). "Utilization of Alternative Financial Services and the Role of Financial Capability". Journal of Consumer Affairs. 59 (1): 1–33.
  5. ↑ The New York Times Editorial Board (June 11, 2016). "Opinion: An Invitation to Abuse by Check-Cashing Stores". The New York Times.
  6. ↑ Harriman, Joshua; Marzahl, David; Neumann, Steve; Owen, O. S. (February 2006). "First accounts: a U.S. Treasury Department program to expand access to financial institutions". Profitwise News and Views. Federal Reserve Bank of Chicago: 15–19. Retrieved 9 September 2026.
  7. ↑ Sawyer, Noah & Tempkin, Kenneth, "Analysis of Alternative Financial Service Providers" Archived 2014-12-09 at the Wayback Machine, Urban Institute Metropolitan Housing and Communities Policy Center and The Fannie Mae Foundation, 2004.
  8. 1 2 "High-cost short-term credit". Financial Conduct Authority. Retrieved 9 September 2026.
  9. ↑ "FCA confirms price cap rules for payday lenders". Financial Conduct Authority. November 2014. Retrieved 9 September 2026.
  10. 1 2 "Regulatory Initiative: Criminal Interest Rate Regulations". Department of Finance Canada. Retrieved 9 September 2026.
  11. ↑ "Amendments to Criminal Rate of Interest Provisions Come into Force". McCarthy Tétrault. 6 January 2025. Retrieved 9 September 2026.

Further reading

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