There are millions of households in America with low incomes and poor credit that find dealing with traditional banks to be difficult. They have chosen instead to patronize “alternative financial” services that provide extended hours and less restrictive credit policies—local check cashing and money transfer outlets, pawn shops, rent-to-own stores, and payday loan services.
This is an industry that is still in demand, despite criticism by some consumer protection groups that high fees are taking advantage of users. Only when banks are open 7 days a week and not just from 9–5, and are willing to make small loans or advances under $1,000 on the spot, will this industry disappear.
I don’t see that happening anytime soon.
Here are the top six things to know about the alternative financial services industry:
- Market value & growth: Marketdata estimates that the market was worth $37.6 billion in 2019—1.8% less than in 2018. The industry’s peak was 2013, when the market was worth $43.8 billion. Marketdata forecasts a 4.3% decline in revenues this year, to $36.0 billion, due to the pandemic and recession. For the long-term to 2025, Marketdata forecasts 3.03% average annual gains to $41.5 billion.
- Number of retail outlets: There are 12,000 U.S. check cashing stores, 14,000 payday loan outlets, 800,000 money transfer agents, 11,000 pawn shops, and 10,000 rent-to-own stores competing for this business today.
- Business value: Pawn shops was a $13 billion business in 2019. Check cashing is worth $1.7 billion. Money transfer is worth $7.8 billion. Payday loans and online apps is worth $4 billion. Rent-to-own stores take in $11 billion.
- Effects of Covid-19: Not all services have fared equally this year. Rent-to-own stores’ revenues are estimated to gain 6% this year, as home-bound customers loaded up on rented merchandise such as computers and appliances during the spring. By contrast, revenues in 2020 are expected to be down 22% for check cashing outlets, down 12.2% for money transfer services, down 2.6% for pawn shops, and down 15% for payday loan companies. These outlets are considered essential services and have been open during the pandemic.
- More online services: Several apps (such as Dave, Earnin, and Elevate) have been developed, accelerated by the Covid-19 pandemic. Online services account for an increasing share of the business in all five sectors, especially for small installment loans that are replacing payday loans.
- Big chains look south for growth: The largest competitors such as Purpose Financial, Populus and First Cash (Advance America, ACE Cash Express brands) have grown via the acquisition of smaller players, franchising, new technologies, and expansion into overseas markets such as Latin America.