In the world of traditional banking, alternative financial services providers are often considered shady, corrupt, and greedy. But check cashers and short-term lenders offer options that attract a large swath of the population — including the college educated and middle class as well as the traditionally underbanked. And the popularity of alternative FIs is growing. According to the FDIC, transaction volume at alternative financial services is estimated at more than $320 billion annually.
Why is that? And how can credit unions tap into that market under consumer-friendly terms?
According to the National Endowment for Financial Education, “42% of millennials use alternative financial services” (page 9). This is the same group in which six out of 10 have a bachelor’s degree. Middle class and wealthier consumers also use alternative financial services. According to the Center for Retirement Research at Boston College, alternative financial services are “more prevalent among non-Hispanic whites, college graduates, and people who earn more than $50,000.”
There’s a notion out there that consumers use alternative financial services because they’re uneducated and don’t know they have better choices. But it’s worth considering that users don’t have another choice. Or, they’re aware of their choices and are making an educated decision about which works best for them.
Bridging The Gap
WSECU ($2.5B, Olympia, WA) has tapped into the needs and expectations of users of alternative financial services. Ben Morales, chief technology and operations officer at WSECU, leads a CUSO called QCash Financial whose short-term lending platform is in use at WSECU and several other credit unions.
QCash users include people who aren’t using short-term lenders to bridge the gap between paychecks. For example, one member uses QCash for cashflow for his stock trading.
“It costs him the $25 fee and about four days of interest and he gets a whole lot of convenience in return,” Morales said in a CreditUnions.com article. “Plus, we get some revenue and a bit of interest out of it, so I’d call it member service at its best.”
Admittedly, using short-term loan services to bridge finances for stock trading might not be a common practice; however, the fact this member does use the services serves to illustrate that it’s not solely poorer demographics that use short-term lenders, payday lenders, and check cashers.
The Ability To Budget
In “The Unbanking of America,” author Lisa Servon tackles the stereotypes of alternative financial services. She even worked at a check casher to learn, firsthand, what these services are all about.
For the sake of My Generation, let’s look at Servon’s observations as to why millennials use check cashers instead of banks.
“A 25-year-old is 133% more likely to pay an overdraft fee than a 65-year-old,” Servon writes. “And nearly 11% of consumers between the ages of 18 and 25 have more than 10 overdrafts per year.”
Many of the people the author encountered would rather pay the transparent, expected fee associated with cashing a check than deal with unexpected overdraft fees and charges at a bank.
From my viewpoint, I can see the attractiveness in an alternative FI that provides quick, reliable service. I also see the appeal of money on the spot — i.e., no waiting for a deposit to clear — which is especially important for those who cannot afford to be late on a bill.
Who You Calling Shady?
In Washington, QCash enables WSECU to reach a new group of potential members. And through the service, the credit union can offer convenience, such as mobile applications, as well as a financially sound offering, as rates are typically much lower than those at alternative finance companies.
Instead of accepting the status quo as to who uses alternative financial services and why, Morales considered what these services offer and implemented a program for his credit union members.
Today, people using these services are often quite financially savvy and experienced.
“This solution is attractive to a wide spectrum of ages and socioeconomic status,” Morales says.
My Time. My Money. My Choice.
This all ties into a recurring theme throughout these My Generation blogs: Millennials want a quickly accessible and friendly banking experience. From whoever can provide it.
Banks and credit unions are not the only institutions available to manage money. And sometimes, a check casher is more convenient than the local bank or credit union. The fact millennials are willing to use a diverse set of service providers allows them to manage their money more effectively and on their terms.
This is where mainstream banking often goes wrong.
Limited branch or ATM locations, high fees, noncompetitive rates, mistakes, and poor customer service drives away consumers, reports The Charlotte Observer.
Credit unions have the tools to compete against both large banks and alternative financial services. They can provide needed services in the trusted setting of a local, not-for-profit financial cooperative — and in doing so might find themselves the trusted advisor for more than a millennial.