Report
22
Number
Jan 01 1997

Lower Income Americans, Higher Cost Financial Services

This research examines the use of financial services by lower income U.S. households and reviewed the fees and operations of nondepository suppliers of financial services, such as check-cashing outlets, pawnshops, and rent-to-own businesses. 

John P. Caskey
Swarthmore College
Report Number 22

Executive Summary

The 40 million American households with incomes under $25,000 need payment, savings, loan, and other financial services in the contemporary economy, but in many cases they often turn to financial service providers that are very different from those serving middle- and upper-income households. This report examines how and why many modest-income households use check-cashing outlets, small-loan companies, pawnshops, rent-to-own companies, and other non-depository suppliers of financial services. In addition, this report examines the fees and operations of these suppliers who are often referred to collectively as members of the "alternative financial" (AFS).

The alternative financial sector is poorly understood by the general public and most traditional financial institutions. Outsiders sometimes charge that these providers are abusive and usurious. Some are. However, a closer look reveals that lower-income households turn to these alternative providers because they provide products, services, and overall convenience from which they may be financially excluded at banks, thrifts, and credit unions.

What is the research about?

This report by John Caskey and his previous insightful book, Fringe Banking: Check-cashing Outlets, Pawnshops, and the Poor, together provide the most comprehensive treatment of the alternative financial sector now available. The author has based this latest work on a recently obtained data set, which provides the most complete information available to date on the AFS sector.

What are the credit union implications?

Research on the AFS deserves the attention of credit unions, other deposit institutions, and policy-makers for several reasons. First, this sector has grown rapidly over the last fifteen years; some pawnshop and check-cashing chains have grown large enough to have their stock listed on major stock exchanges. Second, relatively little is known about the real, underlying reasons for their growing popularity and economic success. Third, many credit unions desire to expand services to modest income households who currently patronize AFS businesses.