Today, consumers literally swim in a sea of providers offering them alternative financial services and solutions. But what exactly is an alternative financial service (AFS)? Who uses them, and why do they use them? The answers to these questions shed light on the ever-changing paradigms involving people, and how they access and/or use their money.
An AFS is defined as any provider of financial services choosing to operate outside the established realm of traditional, federally insured financial services providers such as banks. The AFS population is incredibly diverse, made up of a melting pot of providers. These include check-cashing outlets, money transmitters, car title lenders, payday loan stores, pawnshops, quick loan companies, and rent-to-own stores. They offer services such as check cashing, remote deposit capture, money orders, person-to-person (P2P) payments, and virtual and physical prepaid GPR cards.
Of course, the channels through which they offer these services can also be considered alternative, moving away from the traditional brick-and-mortar bank branches or storefronts to the Internet (can we still call that an alternative channel?), financial services kiosks, and mobile phones. However, don’t be fooled by the emotional charge carried by the term ‘alternative.’ Many of the financial services they offer are either identical or very similar to those offered by banks and other more mainstream providers. At first glance, this might seem problematic for banks; the truth is that this similarity just might enable banks to expand their footprint while also attracting new customers as time goes by. A key tactic is to rebrand, moving away from traditional bank names (California Federal Bank, City National Bank of Taylor, etc.) to something less traditional that speaks more to the type of client relationships that banks want to build (Ally, ConnectOne Bank). In fact, banks already exploring the AFS space, or looking to expand their AFS capabilities should really look at providing a comprehensive AFS solution. Banks not in the AFS space should really consider getting on board now in order to capture this high growth market opportunity!
Still, the AFS channel is an increasingly popular and profitable one. According to data provide by the FDIC, the estimated AFS transaction volume is $320 billion annually. That’s a very conservative estimate because the alternative channel is hard to define and many of the participating providers are either very small or privately held. As for what services are being used and what dollar figure is associated with that use, the FDIC provides the following statistical breakdown:
- Buy Here, Pay Here Auto Loans = $80 billion
- Check Cashing = $58 billion
- Pay Day Loans = $48 billion
- Remittances – $46 billion
- Open Loop Prepaid Cards = $39 billion
- Refund Anticipation Loans = $26 billion
- Money Order = $17 billion
- Rent-To-Own Transactions = $7 billion
From here, it looks like AFS providers enjoy good business- and business is booming! Essentially, AFS providers are broken into two main categories: transaction-based and credit-based. The more than 13,000 transaction-based providers are represented by the Financial Service Centers of America (FiSCA). According to FiSCA estimates, AFS providers:
- Process more than 170 million checks per year, totaling more than $58 billion.
- Sell money orders with a face value of $17.6 billion per year, at an average cost of 64 cents each.
- Process more than 57 million bill payment transactions, at an average cost of 86 cents per transaction.
Other statistics help us understand why AFS providers continue to grow:
- Move towards Fee Transparency: 1 in 4 consumers distrust products with hidden rates/fees.
- Concierge Service: 2 out of 5 customers switch banking providers due to poor attention to customer service. As a matter of fact, consumers will pay a 9% premium to those providers who can resolve issues through a live representative.
- Digital Services: 3 out 5 consumers demand more digital options rather than traditional servicing methods.
- Promote Innovation: Develop product features that matter to customers such as mRDC and relationship solutions (loyalty, companion, and peer-2-peer services).
- Reduction in Interchange Fees allows for infiltration of non-bank payment services (Starbucks, PayPal, and Square). Look for bigger players such as Facebook, Apple and Amazon to enter the market.
- Promotion of Big Data: Ability to create real value and insight based on consumer historical spend.
- Transformation of Single Delivery Channel into an Omni-Channel experience.
- Marketing and Technology convergence. Do away with legacy systems and ‘develop once use often’ strategy (API integration with HTML5).
- Continued Focus on Security and Compliance: Compliance shock should end by close of 2013 and the impact of regulation will be BAU on most product manager’s roadmaps.
These factors drive AFS growth and accessibility:
- They exist in a stream of continual innovation; as technology advances, they find new ways to capitalize on those advances.
- They are more readily accessible and flexible in their operations and hours, making them incredibly convenient.
- While their fees seem prohibitive at first glance, in an economy where traditional banks tightened their loan restrictions, many AFS providers loosened theirs, making them incredibly flexible, therefore, the fees are not an obstacle to those needing these services.
- They are not bound by the requirement for an existing banking relationship (the pay day loan institutions are the exception, since many of them require that customers have an existing bank account).
As to the question of who uses AFS providers, we don’t have to look too far to understand their demographic or to understand the make-up of their model customer. In support of this assertion, Halah Touryalai, writing in the September 2012 issue of Forbes, states, “There’s a growing number of U.S. households that have very limited, or no relationship at all, with the nation’s banks. Since first beginning to survey the general population in 2009, Forbes has reported that in 2012, one in four (28.3%) of all U.S. households conduct some or all of their financial transactions outside of the mainstream banking system.” More to the point, in the last years, one in four households in this country have used at least one AFS product in the past year and almost one in ten households have used two or more AFS products. When we ask who uses AFS providers, the answer is simple: Me, you, and people just like us.