Alternative Financial Services Primer

July 6, 2010

The Federal Deposit Insurance Corporation has published a primer on alternative financial services, in hopes that it might enlighten bankers about opportunities in this potentially lucrative market.

The annual dollar volume of alternative financial services (AFS) market tops $320 billion, FDIC reports. These include both payment and loan products. Here are some specific yearly estimates:

• Rent-to-Own transactions - $7 billion
• Refund Anticipation loans - $26 billion
• Remittances - $46 billion
• Check Cashing - $58 billion
• Payday Loans - $48 billion
• Money Orders - $17 billion

Alternative Financial Services: A Primer was featured in the Fall 2009 issue of FDIC Quarterly and can be found online by clicking here. It provides an overview of the AFS market, details about various services offered and pricing details.

The report, authored by a team of FDIC policy analysts, draws on various data sources, including Financial Service Centers of America (a trade group for nonbanks), the World Bank and the U.S. Treasury.

Payments Pays Well

As the FDIC's report details, there's good money to be had meeting the payments needs of the unbanked and underserved in America.

Financial Service Centers of America (FiSC) counts more than 13,000 nonbank financial services companies nationwide which, together, process over 170 million checks totalling $17.6 billion a year.

FiSC figures its members sell money orders with a total face value of $17.6 billion a year at an average cost of 64-cents each, and 57 million bill payment transactions at an average cost of 86-cents per transaction.

Payday, P2P and other Loans

On the credit side of the business, payday lenders issue well in excess of $50 billion in loans to underserved consumers in need.

Income tax anticipation loans were granted to 10 million consumers on tax returns filed for 2005-2007. The cost of these loans, based on an average refund of $2,600, can range from $58 to $136, the report notes.

Although nascent, the FDIC's data suggests P2P lending continues to be a trend worth watching. In 2007, individuals used P2P lending sites like Prosper and Lending Club to lend/borrow at least $600 million, the report notes.

Governments worldwide make regular payments to more than 170 million poor people (G2P payments)