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Alternative

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Alternative Financial Services

The world of finance is a growing industry, which helps provide the needs for individuals and businesses alike. Within the field of finance, there are many different sectors such as commercial banking, insurance, investment banking, and most importantly, Alternative Financial Services. The term Alternative Financial Services is described on the Federal Deposit Corporations website as follows:

Alternative Financial Services (AFS) is a term often used to describe the array of financial services offered by providers that operate outside of federally insured banks and thrifts (hereafter referred to as "banks"). Check-cashing outlets, money transmitters, car title lenders, payday loan stores, pawnshops, and rent-to-own stores are all considered AFS providers. To sum things up, Alternative Financial Services are basically ways to receive money without using a more traditional way, such as getting a loan from a commercial bank. The different [I would delete “different” – seems repetitive with “incredibly diverse”] types of Alternative Financial Services are incredibly diverse, often described as a melting pot of providers. These different services include car title lenders, pawnshops, rent-to-own stores, and last but not least, payday loan stores. Alternative Financial Services have become increasingly popular since the Great Recession, mainly due to the strict credit regulations among commercial banks. Due to its deep roots in Chattanooga, you will find that I have centered my argument against Alternative Financial Services on the payday loan industry. As of 2006, there were 64-payday loan stores located inside the city limits of Chattanooga. According to a survey conducted by the Social Science Research Network, Tennessee has one of the highest rates of payday lending in the country, with several counties and ZIP codes ranking among the most densely crowded with payday lenders in the country. This type of service is able to loan someone quick cash, however they usually require insanely high fees and/or interest rates. For example, most payday loan stores operate by providing customers loans in low balances [amounts?], typically within the $300 to $500 range. The customer will usually have a two-week period to repay the loan, plus interest. The interest rates on these short-term loans are on average around 300%, if compounded yearly. With these types of interest rates and fees, why would someone succumb to a scam like this? For starters, the Alternative Financial Service industry mainly targets low-income households, specifically people who live paycheck to paycheck. For example, a worker at a fast food chain may be short on cash, but won’t get another paycheck until next week. To acquire the needed cash, this person could walk into a store, show identification and proof of employment, walking out with cash within minutes. By making it this easy for people to acquire needed funds, it is not a [no surprise? not a surprise?] surprise to me how this industry has skyrocketed in recent years. Other typical users of these financial services are unbanked households. While it may seem quite rare for someone to not have some type of bank account, it has been reported that over 10 million people in the United States are unbanked. The main reason (33%) for unbanked households is simply because they do not even enough funds to maintain a bank account. Traditional financial institutions tend to implement policies that contribute to the exclusion of low-income people. For example, banks have begun to charge fees to account holders. These fees usually require [policies require…or fees will be charged?] you to maintain a minimum balance in your account. With these fees, low-income consumers simply aren’t able to maintain that minimum balance. Since they simply [repetitive from prior sentence] can’t afford to maintain a traditional bank account, they are forced to use an Alternative Financial Service. Chattanooga native, Allan Jones, founded Check Into Cash in 1993, which has become one of the major payday lenders in the United States. Mr. Jones, who has been described as “America’s Nastiest Lender,” basically uses the financial strains of the working class to turn a massive profit.

Jones was making good money as a small-town debt collector when he got the bright idea of selling fast and easy two-week loans to all those janitors and warehouse workers and mall clerks forever falling short of cash before the end of the month. He’d charge $20 for every $100 borrowed and he’d let you pay another $20 per $100 if you couldn’t pay him back in full in two weeks. At those rates, he was making more than 500 percent interest on his money.

This quote about Allan Jones is a prime example of how and whom Alternative Financial Services target. If these borrowers would pay more attention to the little details involved with these transactions, they would most likely realize what they are getting themselves into. However though, [maybe delete “though”?] almost 100% of payday borrows seem to return for a new loan within a month, which is depicted in the following graph:

Financial literacy plays a huge role in the use of Alternative Financial Services. According to the Federal Deposit Insurance Corporation, large numbers of people who use AFS display very low levels of financial literacy. It has been noted that roughly 17 percent of young adults with a college degree have used Alternative Financial Services, compared to 45 percent of young adults with a high school diploma or less. So it can be concluded, that among young adults, using Alternative Financial Services has become increasingly common, mainly among those with a lower level of education. Financial literacy has been linked to several indicators of financial behavior. For example, a survey by Agarwal, Skiba, and Tobacman looked at a sample of payday borrowers who also have access to credit credits, and the results were shocking. Around two-thirds of the people in their sample had at least $1000 in credit card liquidity on the day they took out their first loan. Given average charges for payday loans and credit cards and considering a two-week payday loan of $300, the use of credit cards would save these borrowers as much as $52. The following graph represents the difference in interest between using a payday loan and a credit card:

This largely unregulated industry has become a major problem in the lives of these borrowers, while it has provided a substantial return for the lenders. With the emergence of the two-tiered financial services ,the issue is simple. While I do understand why banks would do this and how it helps them operate as a business, restrictions like this has helped contribute to the growth of Alternative Financial Services. In reference to payday loans, unfair practices within the industry are another cause for concern. These unfair practices such as rollovers usually contribute to the lowering of the borrowers financial status, while increasing the financial status of the lender. “For a good portion of the 14 hours we spent together I endured his belly-aching about how much more he’d be making if he didn’t have to contend with the pointy-headed liberals and other critics who want to put a cap on how much he could charge.” The term rollover basically describes the refinancing of the consumers debt. The accumulation from frequent refinancing this debt usually results in the failure of the borrowers’ ability to pay it back, which often results in foreclosure. To help with the issues of Alternative Financial Services, Policymakers have attempted to respond to the emergence of a two-tiered financial services market and unfair practices of AFS businesses through a variety of approaches. For example, The Financial Services Modernization Act of 1999 overturned a Supreme Court decision that prevented credit unions from adding new groups to their membership from low-income communities currently underserved by commercial banks. States also have experimented with zoning reforms and banking development districts to encourage traditional institutions to expand services in underserved areas. States have sought to increase the effectiveness of their oversight of the practices of AFS businesses through licensing and reporting requirements. For example, 22 states require licensure or permits for CCOs A reported 22 states prohibit payday lending, which is represented on the following map:

While I do not like the idea, I believe that Alternative Financial Services will continue to grow. By living in a world that runs on the use of technology, I believe that our society’s dependence on technology will help contribute to the growth of Alternative Financial Services. By simply typing “online payday loans” on Google, one can go through pages and pages of different companies offering these loans. Even though using this service online is generally more expensive then going into a storefront, I believe that the use of online lending will pull more borrowers into this industry. By providing services online, these services are more readily accessible, making them incredibly convenient. In addition, with banks tightening their loan restrictions, Alternative Financial Services will loosen theirs, which will almost force certain people to use these services.

Bibliography
AARP. (2000). Public Policy Agenda. <http://www.aarp.org/legiply.html>.
"Alternative Financial Services: A Primer." Federal Deposit Insurance Corporation. N.p., n.d. Web. 20 Oct. 2014.
Alternative Financial Services: Chattanooga, Tennessee (n.d.): n. pag. Chattanooga-Hamilton County Regional Planning Agency. July 2006. Web. 23 Oct. 2014.
"Center for Responsible Lending." APR Matters on Payday Loans. N.p., n.d. Web. 24 Oct. 2014.
"Center for Responsible Lending." Phantom Demand: Short-term Due Date Generates Need for Repeat Payday Loans, Accounting for 76% of Total Volume. N.p., n.d. Web. 24 Oct. 2014.
Dennis Telzrow, "Payday Loan Industry," Industry Report, Stephens Inc. Investment Bankers, March 27, 2007. A September 6, 2008, article by Bob Driehaus in the New York Times, entitled "Some States Set Caps to Control Payday Loans"
Doyle, J., Lopez, J., and Saidenberg, M. ìHow Effective is Lifeline Banking in Assisting the ëUnbankedí?î Current Issues in Economics and Finance. Federal Reserve Bank of New York, June 1998.
Eskin, S. ìCheck Cashing: A Model State Statute.î Report prepared for AARP Public Policy Institute (D16910), 1999.
Hiris, Lorene. "Leading and Coincident Indexes for The Financial Services Industry." Indian Economic Review 36.1, Analysis of Business Cycles (2001): 125-35. Public Policy Institute. Web. 22 Oct. 2014.
Lusardi, Annamaria. Financial Literacy and High-Cost Borrowing in the United States (n.d.): n. pag. Federal Deposit Insurance Corporation. Oct. 2013. Web. 20 Oct. 2014.
Peterson, Christopher L. and Graves, Stephen M. (draft March 9, 2005). Predatory lending and the military: The law and geography of “payday” loans in military towns
Public Interest Research Groups (PIRGs) and The Consumer Federation of America (CFA). ìShow Me the Money,î February 2000.
Rivlin, Gary. "America’s Nastiest Lender." The Daily Beast. Newsweek/Daily Beast, 25 June 2011. Web. 21 Oct. 2014.
"US Alternative Financial Service Industry Statistics." The Credit Examiner. N.p., n.d. Web. 21 Oct. 2014.

--------------------------------------------
[ 1 ]. "Alternative Financial Services: A Primer." Federal Deposit Insurance Corporation. N.p., n.d. Web. 20 Oct. 2014.
[ 2 ]. Alternative Financial Services: Chattanooga, Tennessee (n.d.): n. pag. Chattanooga-Hamilton County Regional Planning Agency. July 2006. Web. 23 Oct. 2014.
[ 3 ]. Peterson, Christopher L. and Graves, Stephen M. (draft March 9, 2005). Predatory lending and the military: The law and geography of “payday” loans in military towns
[ 4 ]. Dennis Telzrow, "Payday Loan Industry," Industry Report, Stephens Inc. Investment Bankers, March 27, 2007. A September 6, 2008, article by Bob Driehaus in the New York Times, entitled "Some States Set Caps to Control Payday Loans"
[ 5 ]. "US Alternative Financial Service Industry Statistics." The Credit Examiner. N.p., n.d. Web. 21 Oct. 2014.
[ 6 ]. Lusardi, Annamaria. Financial Literacy and High-Cost Borrowing in the United States (n.d.): n. pag. Federal Deposit Insurance Corporation. Oct. 2013. Web. 20 Oct. 2014.
[ 7 ]. Rivlin, Gary. "America’s Nastiest Lender." The Daily Beast. Newsweek/Daily Beast, 25 June 2011. Web. 21 Oct. 2014.
[ 8 ]. "Center for Responsible Lending." Phantom Demand: Short-term Due Date Generates Need for Repeat Payday Loans, Accounting for 76% of Total Volume. N.p., n.d. Web. 24 Oct. 2014.
[ 9 ]. Lusardi, Annamaria. Financial Literacy and High-Cost Borrowing in the United States (n.d.): n. pag. Federal Deposit Insurance Corporation. Oct. 2013. Web. 20 Oct. 2014.
[ 10 ]. "Center for Responsible Lending." APR Matters on Payday Loans. N.p., n.d. Web. 24 Oct. 2014.
[ 11 ]. Hiris, Lorene. "Leading and Coincident Indexes for The Financial Services Industry." Indian Economic Review 36.1, Analysis of Business Cycles (2001): 125-35. Public Policy Institute. Web. 22 Oct. 2014.
[ 12 ]. Rivlin, Gary. "America’s Nastiest Lender." The Daily Beast. Newsweek/Daily Beast, 25 June 2011. Web. 21 Oct. 2014.
[ 13 ]. Public Interest Research Groups (PIRGs) and The Consumer Federation of America (CFA). ìShow Me the Money,î February 2000.
[ 14 ]. AARP. (2000). Public Policy Agenda. .
[ 15 ]. Doyle, J., Lopez, J., and Saidenberg, M. ìHow Effective is Lifeline Banking in Assisting the ëUnbankedí?î Current Issues in Economics and Finance. Federal Reserve Bank of New York, June 1998.
[ 16 ]. Eskin, S. ìCheck Cashing: A Model State Statute.î Report prepared for AARP Public Policy Institute (D16910), 1999.
[ 17 ]. Hiris, Lorene. "Leading and Coincident Indexes for The Financial Services Industry." Indian Economic Review 36.1, Analysis of Business Cycles (2001): 125-35. Public Policy Institute. Web. 22 Oct. 2014.…...

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