Alternative Financial Services: A Primer

Introduction

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"). Checkcashing outlets, money transmitters, car title lenders, payday loan stores, pawnshops, and rent-to-own stores are all considered AFS providers. However, many of the products and services they provide are not "alternative"; rather, they are the same as or similar to those offered by banks. AFS also sometimes refers to financial products delivered outside brick-and-mortar bank branches or storefronts through alternative channels, such as the Internet, financial services kiosks, and mobile phones.

This article provides an overview of AFS and a description of the key products and services in this sector. It is intended as a primer for banks and others who are interested in understanding the competitive landscape in the financial services industry and exploring suitable opportunities in the AFS sector. Because of the large size of the AFS sector, some banks use less traditional products, services, and distribution methods to target new customers, particularly among unbanked and underbanked households

AFS Transaction Volume

Data on the volume of AFS transactions are incomplete because of the lack of a clear definition of the term AFS and because this sector is highly fractured among many different providers that are often small or privately held. As shown in Chart 1, the transaction volume is estimated at more than $320 billion annually. This figure is likely understated, as estimates are not current or available for various AFS segments.

AFS comprise two general categories of products and services: those that are transactional and those that are related to credit. The key products and services offered in these categories are described below, along with examples of the types of companies, including banks, that provide them.

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