"Alternative Financing": An Unnecessary Evil or a Key Service for the Underbanked?

For those of us who believe financial inclusion is an attainable goal, Lisa Servon's article "Ritecheck 12" might challenge some preconceived notions about check cashers and the role they play in the industry. The article, published on Public Books, details what Servon learned about the "alternative financing industry" working as a teller in the South Bronx.

As a professor at the New School in New York, Lisa Servon focuses her research on the financial lives of low-income communities. And as she quickly points out in her article, her experience as a teller in the South Bronx put her right in the crosshairs of a neighborhood of financial exclusion -- with one bank per 20,000 residents, compared to one for every 3,000 residents in neighboring Manhattan. The clients she served provide a very clear picture of why the underbanked rely on alternative financial services, such as Ritecheck. This topic is especially relevant this week with the Attorney General of New York, Eric T. Schneiderman, announcing that the state of New York would be suing online lenders Western Sky Financial LLC, CashCall Inc. and its subsidiary WS Funding.

It's important when participating in this conversation to understand who the underbanked are. And alarmingly, according to the 2011 FDIC National Survey of Unbanked and Underbanked Households, they are 1 in 5 households in the U.S. (20.1 percent). Moreover, a startling 30 percent of households in the U.S. do not even have a savings account. These statistics took many by surprise, as it is so easy to assume we all have equal access to the products that make our financial lives simpler. But that unfortunately is not the case, and a very strong indicator for why approximately 30 percent of the American population in cities and states all across the country rely on check cashers to provide essential financial products.

Check cashers provide a wide variety of services, including instant check cashing, bill payments, money orders, notaries, fax and photocopying, pre-paid cards, lottery tickets, and some even offer savings accounts. They provide easy access, extended hours, speed, customer service, and a comfortable environment -- all contributing factors to the check cashing industry's growth. And there have been few alternatives.

Today the marketplace is alive with activity. Online banking and other financial products have emerged at great pace and are being distributed in many new outlets. Whether these new products are good financial products remains to be seen, so does their rate of adoption among the perennially underbanked.

A few things are clear: The marketplace is changing, the ranks of the underbanked are likely to grow, and alternatives to traditional banking relationships and products are playing a very significant role.

Servon's piece gives us a great trigger for dialog. How can we -- those who believe in and work to build a financially inclusive world -- develop a deeper understanding of the needs of the underbanked so that we promote good products and good financial practices, strengthen the delivery systems, and apply rigorous standards to our evaluation of the market players?

It is our job to come to the table informed. I look forward to both listening and participating in the conversation.