Feature Article: 

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.1 

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. 

1 See “FDIC Survey of Banks’ Efforts to Serve the Unbanked and 

Underbanked, Executive Summary of Findings and Recommendations” 

(issued February 5, 2009), which describes the extent to which 

insured institutions reach out to unbanked and underbanked households, the challenges that banks face in serving these households, and 

innovative products and services that banks have used to overcome 

these challenges. The Executive Summary defines “unbanked” as 

people or families who rarely, if ever, held an account at an insured 

institution. “Underbanked” refers to those with accounts who also rely 

on nonbank AFS providers for financial products and services, often at 

a high cost. The Executive Summary can be found at http://www.fdic. 

gov/news/news/press/2009/pr09015.html. 

Chart 1 

The Dollar Volume of AFS Transactions 

Totals More Than $320 Billion Annually 

Buy-Here-Pay-Here Check Cashing, 

Auto Loans, 

$80 billion 

Money Orders, 

$17 billion 

Rent-to-Own 

Transactions, Payday Loans, $7 billion $48 billion 

Remittances, 

$46 billion 

Open Loop 

$58 billion 

Refund Prepaid Cards, Anticipation Loans, $39 billion $26 billion 

Sources: FiSCA, World Bank, Mercator Advisory Group, U.S. Treasury, Association of 

Progressive Rental Organizations, and Leedom and Associates LLC. 

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. 

Transaction Products and Services 

Check Cashing, Money Orders, and Bill Payment 

Financial Service Centers of America (FiSCA) is the 

national trade association that represents nonbank 

financial service centers. According to FiSCA, more 

than 13,000 nonbank financial services companies 

operate nationwide, providing a variety of financial 

services, primarily check cashing. FiSCA estimates that 

financial service centers process more than 170 million 

checks per year, with a face value of more than $58 

billion. FiSCA also estimates that its members sell 

money orders with a face value of $17.6 billion per 

year, at an average cost of 64 cents each, and they 

process more than 57 million bill payment transactions, 

at an average cost of 86 cents per transaction.2 

2 FiSCA data points were obtained from the trade association’s Web 

site at http://www.fisca.org (accessed on September 12, 2008). 

FDIC QUARTERLY 39 2009, VOLUME 3, NO. 1 
Table 1 

Write-Offs Related to Check-Cashing 

Operations Tend to Be Low 

2008 2007 2006 

Average face value per check $442.30 $420.96 $408.87 

Average fee per check $13.77 $14.51 $14.13 

Average fee as a percentage 3.11% 3.45% 3.46% 

of face value 

Net write-offs as a percentage 0.31% 0.29% 0.26% 

of checks cashed 

Sources: Dollar Financial Corp. and Securities and Exchange Commission (SEC) 10(k) 

dated August 29, 2008. 

Check-cashing firms vary widely in size from very small 

mom-and-pop outlets to publicly traded companies. 

Ace Cash Express, with about 1,700 stores, is the largest 

check-cashing company.3 Dollar Financial Corporation 

is the largest publicly traded check-cashing company, 

with about 470 stores in the United States. In addition 

to check cashing, these companies and many other 

check cashers provide other products and services, 

including money orders, automated teller machine 

(ATM) access, electronic bill payment, payday loans or 

pawnbroking services, and electronic tax preparation 

and filing. Check cashers also sometimes sell public 

transit passes, postage stamps, and phone cards; issue 

motor vehicle license plates and titles; process parking 

tickets; and provide photocopying and faxing services. 

Check cashers typically charge 1 to 4 percent of the 

face value of the check, depending on the check issuer 

and subject to limitations of state law. About two-thirds 

of checks cashed at nonbank outlets are payroll checks; 

another 18 percent are state or federal benefits checks.4 

Table 1 provides data for Dollar Financial Corporation’s 

U.S. check-cashing operation to illustrate the cost of an 

average transaction. As the table shows, net write-offs, 

while increasing, remain less than 1 percent of the face 

value of checks cashed. This example suggests that, 

given the generally low-risk nature of most checks 

cashed, losses tend to be low. 

Retailers are increasingly recognizing the revenuegenerating potential of check cashing and other 

transaction-based financial services. For instance, the 

world’s largest retailer, Wal-Mart, opened its first 

3

 Examples of companies and banks used in this article are for illustration only. The FDIC does not endorse specific companies, products, or 

services. 

4

 Jennifer Tescher, Edna Sawady, and Stephen Kutner, The Power of 

Experience in Understanding the Underbanked Market, Center for 

Financial Services Innovation, July 2007. 

MoneyCenter in 2002; in fiscal 2008, it cashed 45 

million paychecks with a face value of $17 billion.5 

Wal-Mart currently processes more than 2 million 

money order, remittance, and check-cashing transactions per week, and the volume of these services grew 

more than 40 percent in the retailer’s 2008 fiscal year.6 

Convenience store chain 7-Eleven Inc. also offers check 

cashing, money orders, bill pay, and money transfer 

services in select stores through approximately 2,000 

self-service V-Com kiosks.7 

A number of banks also offer fee-based check-cashing 

services, frequently with the goal of migrating checkcashing customers to more traditional bank products. 

For example, KeyBank in Cleveland, Ohio, has been 

experimenting with fee-based check cashing and other 

transactional services under a program called KeyBank 

Plus. As of early 2008, KeyBank had cashed checks with 

a face value of more than $37 million and incurred only 

$10,000 in write-offs. KeyBank expanded the program 

from 5 branches in one market to 200 branches in six 

markets, and opened checking accounts for more than 

17,000 check-cashing clients.8

 Also, the First National 

Bank of Syracuse, Kansas, operates an innovative 

branch in the world’s largest beef-processing plant and, 

among other things, cashes close to 400 payroll checks 

a week through an ATM (see text box on page 42). 

Remittances

According to estimates from the World Bank, recorded 

remittances of money from one country to another 

totaled $355 billion in 2007, up from $307 billion in 

2006. Remittances are projected to top $375 billion in 

2008.9

 The United States is the leading remittancesending country. During 2007, U.S. remittances to 

5

 Digital Transactions, “Wal-Mart Exec Happy with Money Card, but 

Stays Mum on Details,” March 5, 2008. 

6

 Ibid. 

7

 V-Com kiosks are advanced-functionality automated teller machines 

(ATMs) that are owned and operated by Cardtronics Inc. Cardtronics 

Inc. has not publicly disclosed the dollar volume of transactions 

conducted through V-Com kiosks. 

8

 Information on KeyBank Plus was derived from a March 19, 2008, 

presentation by Michael Griffin, senior vice president, Key Bank, Cleveland, Ohio, to the FDIC’s Advisory Committee on Economic Inclusion. 

Meeting minutes are available at http://www.fdic.gov/about/comein/ 

minutesMarch1908.pdf. 9 See data spreadsheet for Dilip Ratha, Sanket Mohapatra, K. M. 

Vijayalakshmi, and Zhimei Xu, “Outlook for Remittance Flows, 

2008–2010,” Migration and Development Brief 8, World Bank, November 11, 

2008, http://siteresources.worldbank.org/INTPROSPECTS/Resources/

334934-1110315015165/RemittancesData_Nov08(Release).xls. 

FDIC QUARTERLY 40 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alternative Financial Services 

Chart 2 Chart 3 

12.9 13.6 14.4 

15.4 16.3 

17.3 

18.3 

Projections Indicate That Remittance Fees 

Will Top $18 Billion by 2010 

Billions of Dollars 

Source: AITE Group, “Competing in Money Transfers: A Market Overview,” news release, 

March 26, 2007. 

0 

2 

4 

6 

8 

10 

12 

14 

16 

18 

20 

2004 2005 2006 2007 2008 2009 2010 

Estimates Indicate That Only 13 Percent of 

Remittance Activity Is Conducted through 

Mainstream Financial Institutions 

Percent of Remittance Activity 

80 

70 

60 

50 

40 

30 

20 

10 

0 

70 

11 10 7 

2 

Wire Transfer Bank By Hand Mail Credit Union 

Source: Roberto Suro, “Remittance Senders and Receivers: Tracking the Transnational 

Channels,” Multilateral Investment Fund and Pew Hispanic Center, November 2003. 

other countries totaled $46 billion.10 However, activity 

has slowed recently as a result of the weakening economy. In a 2008 poll, the Inter-American Development 

Bank reported that 50 percent of Latin American adults 

in the United States regularly sent money home, 

compared with 73 percent in 2006.11 

The World Bank projects a slowdown in the growth of 

global remittances in response to the overall economic 

malaise but explains that remittances tend to be more 

resilient than other types of inflows, such as private 

capital or official aid.12 A market research firm, AITE 

Group, projects that global remittance flows will reach 

$500 billion by the year 2010 and remittance fees will 

top $18 billion (see Chart 2). 

International remittance activity is conducted primarily 

outside of banks (see Chart 3). The largest provider of 

international remittance services is Western Union 

Inc., with 335,000 agent locations in more than 200 

countries. In 2007, Western Union processed more 

than 167 million customer-to-customer transactions 

with a face value of $64 billion. Of that amount, about 

$57 billion represented international transfers.13 Western Union uses its Gold Card product to improve the 

efficiency of the remittance process. This card stores 

customer information, eliminating the need for forms 

10 See data spreadsheet for Ratha et al., “Outlook for Remittance 

Flows, 2008–2010,” http://siteresources.worldbank.org/ 

INTPROSPECTS/Resources/334934-1110315015165/ 

RemittancesData_Nov08(Release).xls. 11 Inter-American Development Bank, “Survey of Latin American Immigrants in the United States,” April 30, 2008, 

http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=1417613. 12 Ratha et al., “Outlook for Remittance Flows, 2008–2010.” 

13 Western Union Inc., 2007 SEC Form 10(k), February 2008. 

and reducing transaction times. The Gold Card is also a 

loyalty mechanism, enabling consumers to earn points 

that are redeemable for goods and services.14 

Most banks offer wire transfer and automated clearing 

house (ACH) services as part of their normal course of 

business for account customers. However, others have 

specifically targeted international remittance business as 

an opportunity to generate fee revenue and to cross-sell 

accounts and other products. For example, Wells Fargo’s 

InterCuenta Express facilitates remittances between the 

United States and Mexico. To participate, customers 

must open a Wells Fargo account with at least $10 and 

must send money to a bank account in Mexico. Within 

the first seven months of offering InterCuenta Express, 

Wells Fargo opened 20,000 new accounts totaling $50 

million.15 Wells Fargo has also instituted a nonaccount, 

cash-to-cash remittance product, ExpressSend, targeted 

to certain parts of the world.16 

Other options are available for smaller banks that 

provide remittance services through cooperatives. For 

example, the Federal Reserve System and Banco de 

Mexico, the central bank of Mexico, have established 

Directo a México, an account-to-account service that 

14 Information regarding Western Union’s Gold Card program was 

derived from the company Web site at http://www.westernunion.com 

(accessed on September 26, 2008). 

15 Information regarding Wells Fargo’s InterCuenta Express was 

derived from 2005 program information contained in a report by 

Appleseed, “Banking Immigrant Communities, A Toolkit for Banks 

and Credit Unions,” http://www.appleseednetwork.org/Publications/ 

ReportsToolkits/BankingImmigrantCommunities/tabid/96/Default.aspx. 16 Information regarding Wells Fargo’s ExpressSend product was 

derived from the company Web site, http://www.wellsfargo.com 

(accessed February 4, 2009). 

FDIC QUARTERLY 41 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

 

 

 

 

 

First National Bank of Syracuse’s Innovative Branch 

in the World’s Largest Beef-Processing Planta 

In first quarter 2008, the First National Bank of Syracuse, 

Kansas, acquired an innovative branch in the world’s 

largest beef-processing plant, operated by Tyson Foods 

Inc. The plant processes about 6,000 cattle a day and is 

located close to Garden City, Kansas. Garden City is an 

agribusiness community that has a large Latino immigrant population. The Tyson plant is the largest employer 

in the area, with approximately 3,000 workers, or roughly 

10 percent of the population of Garden City. 

The bank branch in the plant opened on July 1, 2002, and 

within six months had opened 200 new accounts and had 

started making consumer and mortgage loans. Tyson has 

a Donna Tanner (vice president, First National Bank of Syracuse, 

Kansas) and Rosa Rivera (branch manager, First National Bank of 

Syracuse, Kansas), discussion with the authors, March 26, 2008. 

uses the ACH payment channel for Mexican remittances. Since almost every bank routinely uses ACH, 

Directo a México allows banks to establish an international remittance program with no additional setup 

costs.17 Small banks interested in providing remittance 

services can also purchase a ready-to-use turnkey remittance product such as Citigroup’s QuikRemit. Citi 

launched QuikRemit in early 2008; the product is operational in more than 90 countries.18 

Prepaid Cards 

Consumer and issuer acceptance of stored value 

(prepaid) cards as a replacement for cash and checks 

has grown tremendously in recent years. The market for 

prepaid cards, as measured by dollars loaded, has nearly 

doubled in the past four years (see Chart 4). 

Prepaid cards can be “closed loop” or “open loop,” 

which refers to how the cards can be redeemed. In 

general, closed loop cards can be redeemed only at locations belonging to the issuer or other limited locations 

and are considered a way to facilitate payments rather 

than generate fees. As shown in Chart 4, $179.6 billion 

was loaded onto closed loop cards in 2007. 

17 Information regarding Directo a México was derived from the central 

bank’s Web site at http://www.directoamexico.com/en/infobancos.html 

(accessed on February 4, 2009). 

18 Citigroup Inc., “Citi Launches New QuikRemit Service, Follows 

Purchase of PayQuick, Aims to Grow Payment Services,” news 

release, February 8, 2008. 

been an active partner with the branch from the start. All 

new employees at the plant receive financial education as 

part of their paid new employee orientation. The orientation covers the basics of banking, including opening a bank 

account, establishing credit, and purchasing a home. In 

addition, bank employees conduct weekly financial education presentations in both English and Spanish in the 

plant’s cafeteria. Tyson believes that the branch’s presence 

and the bank’s commitment to financial education have 

been important factors in reducing employee turnover. 

A check-cashing ATM in the plant cashes about 400 

Tyson payroll checks a week for a fee of about $2.00 each. 

Close to one-third of Tyson’s employees currently have 

accounts with First National, and 650 have enrolled in 

direct deposit. Outstanding consumer and mortgage loans 

at the branch total $6.4 million. 

Chart 4 

The Amount of Money Loaded onto Prepaid Cards 

Has Grown Rapidly in Recent Years 

Billions of Dollars 

250 

200 

150 

100 

50 

0 

Closed Loop Prepaid Cards 

Open Loop Prepaid Cards 

$165 

$147 

$120 

$198 

$218 

2003 2004 2005 2006 2007 

Source: Tim Sloane, “5th Annual Network Branded Market Assessment: Measuring the 

Phenomenal Growth of the Open Prepaid Industry,” Mercator Advisory Group, August 2008. 

The most common type of closed loop prepaid card is 

the retail store gift card. In 2007, about $66.2 billion 

was loaded onto these cards, which are redeemable only 

at the issuer’s store or Web site.19 Government agencies 

are also prominent issuers of closed loop prepaid cards, 

loading $61.9 billion of benefits such as food stamps 

and Temporary Assistance for Needy Families onto 

prepaid cards in 2007. These cards are typically redeemable in multiple locations, such as supermarkets, gas 

stations, and pharmacies. Given their limited uses and 

options for fee generation, closed loop prepaid cards are 

19 In the case of a bankruptcy of the issuing retailer, holders of retail 

gift cards may lose all or a portion of the value of their cards. 

FDIC QUARTERLY 42 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alternative Financial Services 

not considered to be alternative financial services for 

the purposes of this article. 

Conversely, open loop cards can be redeemed at numerous locations and typically create opportunities for issuers to generate fee-based income. While the open loop 

segment, with $38.7 billion loaded in 2007, is much 

smaller than the closed loop segment, it grew 44.4 

percent in 2007 compared with 4.9 percent for the 

closed loop segment. Open loop cards are also often 

referred to as “network branded” because the cards are 

issued with the Visa or MasterCard logo, allowing users 

to redeem funds anywhere those cards are accepted. 

Issuers of open loop cards can be banks or nonbank 

issuers who can gain access, for a fee, to the Visa or 

MasterCard payment systems through partnerships 

with banks. 

Payroll cards are the most prominent type of open loop 

card, with $15.9 billion loaded in 2007. Payroll cards 

are often used by companies with large numbers of 

lower wage or unbanked and underbanked employees as 

a replacement for direct deposit of paychecks. These 

cards are typically issued by banks that have a business 

relationship with the employer. 

Another common type of open loop card, with 

$5 billion loaded in 2007, is the general-purpose gift 

card, sold for a fee at retailers or through issuing banks. 

These include gift cards sold by American Express bank 

or by other banks that brand them with the Visa or 

MasterCard logo. Open loop gift cards are typically 

marketed to the general public as a more flexible alternative to retail store gift cards. General-purpose gift 

cards are sold in predetermined amounts but can usually 

be reloaded for a fee. 

Another type of open loop prepaid card is the financial 

services card, which, unlike the general-purpose gift 

card, is not sold in predetermined amounts. Rather, 

financial services cards are initially funded and reloaded 

in amounts determined by the cardholder. Another 

distinction between general-purpose gift cards and 

financial services cards is that financial services cards 

provide features beyond the ability to pay for goods and 

services, such as direct deposit, ATM access, and bill 

payment. Moreover, issuers of these cards are beginning 

to add more advanced features, such as linked savings 

accounts and credit lines. Given their multiple functions, financial services cards are often marketed as an 

alternative to a traditional checking account and are 

students, and recent immigrants. These cards typically 

carry monthly maintenance fees and various transaction 

fees that can be much higher than traditional accounts, 

but they offer consumers other benefits, such as immediate liquidity and the ability to control spending by 

limiting the amount of money on the card. 

The market for financial services cards doubled in 2007 

to $2.2 billion.20 Generally, these cards are sold at retailers or over the Internet and can be offered by banks or 

nonbanks. The Green Dot card, offered by nonbank 

Green Dot Corporation, is sold online or at retailers, 

such as grocery stores and pharmacies. Fees include a 

$9.95 activation fee, a $4.95 monthly maintenance fee, 

and a $2.50 ATM withdrawal fee.21 The Green Dot 

Corporation and other nonbank issuers of networkbranded cards gain access to the payment networks 

through agency relationships with banks; some banks 

also offer fee-based, prepaid financial services cards 

directly to consumers. For example, H&R Block Bank, 

an FDIC-insured subsidiary of tax preparer H&R Block 

Company Inc., offers the Emerald Card, which allows 

H&R Block’s tax preparation customers to load their 

refunds onto a prepaid debit card. H&R Block also 

offers a savings product tied to the Emerald Card and 

provides small-dollar loans for qualifying consumers.22 

Credit Products and Services 

Payday Lending 

Payday loans are short-term loans typically extended 

to consumers who have a checking account and can 

prove that they are employed. A check or debit authorization, which is postdated to the borrower’s next 

payday, provides security to the lender. Payday loans 

typically involve low balances, in the $300 to $500 

range, and have a two-week term coinciding with the 

consumer’s pay cycle. Most payday loans are made 

through stand-alone payday stores and multiline financial service centers. In 2006, these outlets generated 

20 Information regarding breakdowns of the types of prepaid cards was 

obtained from a report by Tim Sloane, “5th Annual Network Branded 

Market Assessment: Measuring the Phenomenal Growth of the Open 

Prepaid Industry,” Mercator Advisory Group, August 2008. 

21 Information regarding the Green Dot prepaid card was derived from 

the Green Dot Corporation Web site at http://www.greendotonline.com 

(accessed on February 4, 2009). 

22 Information regarding the Emerald Card prepaid card was derived 

from the H&R Block Corporation Inc. Web site at http://www.hrblock. 

frequently targeted to the unbanked or underbanked, com/bank/emerald_prepaid_mastercard/index.html (accessed on October 1, 2008). 

FDIC QUARTERLY 43 2009, VOLUME 3, NO. 1 
Table 2 

Small-Dollar Loan Pilot 3Q08: Summary of Loan Characteristics 

Number of Banks 

Reporting 

Loans Up to $1,000 

Loan Amount 22 

Term (months) 22 

Interest Rate 23 

Non-Zero Fees (dollars) 10 

Loans Between $1,000 and $2,500 

Average Minimum Maximum 

$677 $300 $1,000 

10 2 36 

17.11 9.65 31.78 

$29 $5 $70 

Loan Amount 15 $1,726 

Term (months) 14 

Interest Rate 15 

$1,250 $2,200 

15 5 21 

15.18 9.16 30.13 

Source: FDIC. 

Note: For purposes of determining whether there is a “bright line” for what constitutes a small-dollar loan, banks in the pilot were asked to report on loans above and below a $1,000 threshold. 

about $42 billion in payday loans, with Internet lenders 

adding another $5.65 billion.23 

QC Holdings Inc. is the largest publicly traded 

company primarily dealing in payday lending, with 532 

stores in 27 states as of year-end 2007. QC Holdings 

generated $183 million in payday loan fees on approximately $1.3 billion in loan volume in 2007. The 

company reports that the average loan for the past 

three years has been about $360, the term has been 

about 16 days, and the fee has been about $53. The 

annual percentage rate (APR) on these loans is approximately 400 percent. The average customer of QC 

Holdings receives six payday loans per year, and the 

company reports that gross losses approximated 7 

percent of total loan volume in 2007.24 

Payday loan customers are by definition also bank 

customers, because they must have a checking account 

to obtain a payday loan. However, many banks have 

not been involved in extending small-dollar loans on a 

large scale, primarily because of concerns about the 

costs and feasibility of such programs. 

To explore the feasibility of banks offering small-dollar 

loan programs, the FDIC selected 31 banks in February 

2008 to participate in its Small-Dollar Loan Pilot Program. 

23 Dennis Telzrow, “Payday Loan Industry,” Industry Report, Stephens 

Inc. Investment Bankers, March 27, 2007. A September 6, 2008, article by Bob Driehaus in the New York Times, entitled “Some States Set 

Caps to Control Payday Loans,” cites figures from Stephens Inc. indicating that the payday loan industry originated $50 billion in loans in 

2007. However, the FDIC has been unable to obtain the source data for 

the citation. 

24 Data regarding QC Holdings were obtained from the company’s 

2007 SEC Form 10(k), filed March 14, 2008. 

This program is a two-year case study designed to identify the most effective features of profitable, scalable, 

small-dollar loan business models for banks.25 During 

the first three quarters of the pilot, participating banks 

originated more than 11,700 loans with a principal 

balance of $13.5 million. For banks participating in the 

pilot, loan balances are typically higher, loan terms are 

longer, and interest rates are lower than loans offered by 

payday lenders (see Table 2). 

Bankers in the pilot program have indicated that they 

believe their small-dollar loan programs are an important way to serve their communities and create goodwill 

for their banks. Most of the bankers view small-dollar 

loan programs as a long-term strategy intended to 

attract customers and create relationships. Although 

many of the programs in the pilot are new, banks with 

established programs indicate that small-dollar loan 

customers have tended to migrate to other products, 

which contributes to profitable relationships over the 

long term. 

Refund Anticipation Loans 

Refund anticipation loans (RALs) are short-term loans, 

usually 7 to 14 days, offered by tax preparers as a 

purported way to speed the taxpayer’s receipt of a tax 

refund. They are secured by the expected refund, and 

the RAL fee is deducted from the refund. Generally, 

RALs are funded by banks through partnerships with 

tax preparers. For tax years 2005 to 2007, approximately 

25 More information is available at http://www.FDIC.gov/SmallDollar

Loans. Also, an article that describes the pilot program and summarizes first quarter results can be found at http://www.fdic.gov/bank/ 

analytical/quarterly/2008_vol23.html. 

FDIC QUARTERLY 44 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alternative Financial Services 

10 million consumers received these loans.26 The price 

of a RAL for an average refund of $2,600 can range 

from $58 to $136.27 H&R Block Inc., the largest issuer 

of RALs, issued 3.9 million RALs in fiscal 2007, generating revenues of $189.8 million.28 

Although banks do not generally offer RALs directly to 

consumers, some banks participate in the Volunteer 

Income Tax Assistance (VITA) program operated by 

the Internal Revenue Service (IRS). This program 

offers free preparation of income tax returns for lowand moderate-income people. VITA sites are generally 

located at community centers, libraries, nonprofit organizations, and other convenient locations. VITA sites 

are staffed by volunteers, and most locations offer free 

electronic filing to help taxpayers receive their refunds 

quickly, in lieu of paying a fee to obtain a RAL. 

Bank employees can participate at VITA sites, offering 

to open checking or savings accounts for customers who 

can then use the accounts to electronically deposit 

their tax refund. Customers can also elect to split the 

refunds between accounts so they can more easily save a 

portion of the refund. The FDIC partners with the IRS 

in the VITA program and has issued reminders to the 

banking industry and others that banks involved in 

VITA programs may be eligible for favorable consideration under the Community Reinvestment Act (CRA) 

rules and also are likely to benefit from opportunities to 

open accounts and provide other banking-related 

services to underserved consumers.29 

Other Credit Products 

AFS providers offer a number of other credit products 

that banks typically do not provide. The following is a 

brief description of several products that are used when 

26 Treasury Inspector General for Tax Administration, “Many Taxpayers 

Who Obtain Refund Anticipation Loans Could Benefit from Free Tax 

Preparation Services,” Reference Number: 2008-40-170, August 29, 

2008, http://www.ustreas.gov/tigta/auditreports/2008reports/ 

200840170fr.pdf. 27 Chi Chi Wu and Jean Ann Fox, “Coming Down: Fewer Refund Anticipation Loans, Lower Prices from Some Providers, but Quickie Tax 

Refund Loans Still Burden the Working Poor,” National Consumer Law 

Center Inc. and Consumer Federation of America, March 2008. 

28 H&R Block, SEC Form 10(k), June 30, 2008. 

29 FDIC, “Volunteer Income Tax Assistance: Potential CRA and Business Opportunities May Start Before Tax Season,” Financial Institutions Letters, FIL-97-2007, November 7, 2007; “Volunteer Income Tax 

Assistance: A Reminder and Update About Potential CRA and Business 

Opportunities,” January 16, 2007; Financial Institution Letters, FIL-5-

2007, January 16, 2007; and FDIC, “FDIC Encourages Taxpayers to 

Take Advantage of IRS Programs and Save More of Their Refunds,” 

news release, January 16, 2007. 

consumers do not qualify for, or otherwise do not wish 

to use, credit from mainstream financial institutions: 

Rent-to-own (RTO): The RTO business sells big-ticket 

consumer products—such as furniture, computers, appliances, and electronics—under rental-purchase agreements that allow consumers to own the goods at the 

end of the agreement. According to the Association of 

Progressive Rental Organizations, a national trade group 

for RTO firms, the market had 3 million customers and 

a total transaction volume of $6.8 billion in 2007. For 

the past 12 years, revenues have grown at an average 

rate of about 3.5 percent per year.30 

Buy-here-pay-here (BHPH): BHPH is a form of auto 

financing, generally for credit-impaired borrowers, that 

is similar to the RTO business. With BHPH, the dealer 

finances the sale of a used car and usually requires the 

borrower to return to the dealership weekly or biweekly 

to make payments. BHPH is a fractured industry with 

few large or publicly traded participants, making it difficult to estimate transaction volume. However, according to a 2002 report by an industry consultant, BHPH 

transactions top $80 billion per year.31 

Pawn lending: Pawn lending is a short-term, secured 

lending transaction in which the lender typically takes 

physical possession of the item securing the loan (often 

jewelry or other personal goods). The lending agreement allows the pawn lender to take possession of and 

sell the collateral if the borrower does not meet the 

terms of the agreement. Recent estimates of the overall 

scale of pawn lending are not available. However, the 

largest publicly traded pawn lender, Cash America 

International Inc., with 500 stores in 22 states, reported 

making $514 million in pawn loans in 2007, with 

APRs ranging from 12 to 300 percent.32 

Auto title lending: Auto title lending is similar to pawn 

lending, except that title lenders make short-term loans 

that are secured by clear car titles. Interest rates on title 

loans are restricted in many states. The industry is fractured and limited largely to small, privately held compa30 Information regarding RTO statistics was derived from the Association of Progressive Rental Organizations Web site at http://www.rtohq. 

org (accessed on October 22, 2008). 31 Brian Grow and Keith Epstein, “The Poverty Business: Inside U.S. 

Companies’ Audacious Drive to Extract More Profits from the Nation’s 

Working Poor,” Business Week, May 21, 2007. This article used information from Christopher M. Leedom, “Analysis of the Buy Here-Pay 

Here Capitalization Market,” Leedom and Associates, LLC, December 

2002, to derive figures on the BHPH industry. 

32 Cash America, SEC Form 10(k), February 29, 2008. 

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nies. Publicly available data are limited, but in 2005, the 

Center for Responsible Lending (CRL) and the 

Consumer Federation of America (CFA) reported some 

state data regarding car title lending from various sources 

(2003–2005 data). The CRL and CFA reported that 

there are more than 900 pawnshops (most engaging in 

title lending) in Alabama, more than 272 title lending 

licensees in Mississippi, more than 230 title loan locations in Missouri, and about 116 title loan offices in one 

county in Tennessee. They also noted that car title loans 

are a $20 million industry in California, according to one 

lender’s estimates.33 In addition, a recent Public Action 

Foundation and Woodstock Institute report on automobile title lending in Illinois found that 63 title loan 

companies were operating 260 storefronts throughout 

that state in 2005.34 

The Future of AFS 

Innovation is constant across AFS, and many products, 

processes, and technologies are emerging that could 

significantly transform this sector. A complete discussion of innovations is beyond the scope of this article, 

but key trends for banks and others to watch include 

expansion of cellular (mobile) phone financial services 

and person-to-person (P2P) lending. 

Mobile Banking 

Banks and others are actively seeking to leverage 

advances in wireless telecommunications to offer financial services through mobile phones. Cell phones could 

prove to be an important tool for financial companies 

to engage consumers, particularly in nations with developing economies and large rural populations. For example, MasterCard, the Inter-American Development 

Bank, mobile phone providers, banks, and others have 

partnered with GSM Association, a global trade group 

for wireless carriers, to test cell phones as a vehicle for 

international remittances.35 

Domestically, the proliferation of mobile phones in the 

United States increases the attractiveness of mobile 

33 Amanda Quester and Jean Ann Fox, “Car Title Lending: Driving 

Borrowers to Financial Ruin,” Center for Responsible Lending and 

Consumer Federation of America, April 14, 2005. 

34 Woodstock Institute and the Public Action Foundation, “Debt Detour: 

The Automobile Title Lending Industry in Illinois,” September 2007, 

http://www.responsiblelending.org/research/?issue= 

Issue_cartitle&pubtype. 35 GSM Association, “Global Money Transfer Pilot Uses Mobile to 

Benefit Migrant Workers and the Unbanked,” news release, February 

12, 2007; and “GSMA and IDB to Drive Mobile Financial Services to 

Latin America,” news release, September 25, 2008. 

banking. According to one estimate, the overwhelming 

majority (88 percent) of Americans will own a cell 

phone by 2012.36 Mobile network providers, technology 

service providers, nearly all of the 20 largest U.S. banks, 

and many regional and community banks have started 

planning, piloting, or deploying mobile banking applications.37 For example, Bank of America introduced 

mobile banking nationwide in May 2007 as part of its 

online services and now has more than 1 million active 

mobile banking customers.38 Bank of America’s mobile 

services are free and currently allow users to check 

balances, view 70 days of transactions, transfer funds, 

pay bills, and locate ATMs.39 While mobile banking is 

currently not a fee-generating service, it may provide a 

new, convenient, and perhaps preferred delivery channel, particularly for younger consumers. Bank of America reports that two-thirds of its mobile banking users 

are under 35 years old, and four out of five are under 

45 years old.40 

P2P Lending 

P2P lending refers to Web site platforms that apply an 

operational and legal structure to personal loan transactions between individuals. Some P2P platforms, such 

as VirginMoney.com, facilitate and formalize loan 

transactions between borrowers and lenders that know 

each other. Other models, such as Prosper.com and 

Lending Club Corp., serve as online loan auction sites, 

where borrowers post the purpose of their loan and the 

terms that they are willing to accept. After viewing 

these loan requests, lenders bid for all or a portion of 

loans, depending on their risk/return appetite and desire 

for diversification. Some P2P models bypass banks, 

while others rely on bank partners as intermediaries to 

fund loans and then sell all or a portion to individual 

lenders. 

P2P lending is a new concept, with an estimated 

volume of just $600 million in 2007.41 Moreover, like 

many innovations, business models are evolving. For 

36 Catherine Graeber, “Raining on the Mobile Banking Parade,” 

Forrester Research Inc., September 18, 2007. 

37 Bob Egan, Mobile Banking Evolution: Issues and Considerations for 

2008, TowerGroup, November 2007. 38 Bank of America, “Bank of America Reaches One Million Active 

Mobile Banking Customers,” news release, June 11, 2008, 

http://newsroom.bankofamerica.com/index.php?s=press_releases 

&item=8186. 

39 Information derived from Bank of America’s Web site at 

http://www.bankofamerica.com (accessed on October 16, 2008). 40 Bank of America, news release, June 11, 2008. 

41 Kathy Chu, “Peer-to-Peer Lending Hits Its Stride,” USA Today, 

December 25, 2007. 

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Alternative Financial Services 

example, early P2P platforms had few restrictions on 

borrower eligibility, which resulted in adverse selection 

problems and very high loss rates. In general, borrowers 

must now meet certain minimum creditworthiness 

requirements. In addition, some investors viewed the 

lack of liquidity for these loans, most of which have a 

minimum three-year term, as undesirable. As a result, 

Lending Club Corp. recently gained approval from the 

Securities and Exchange Commission (SEC) to operate 

a secondary market system to enable its lenders to trade 

loans among themselves.42 Prosper.com also recently 

filed with the SEC to form a secondary market and 

amended its filing to allow banks to sell previously 

funded loans on the Prosper platform.43 

Conclusion 

This article provides a current snapshot of key AFS 

products and services, but emerging products and technologies could transform this sector. Banks are encouraged to monitor AFS trends to gain an understanding of 

competition in the financial services industry as well as 

to identify emerging markets, products, and delivery 

channels that may be appropriate for a given bank’s 

business plan. Banks involved in offering AFS need to 

42 Daniel Wolfe, “New Approach Puts Secondary Market to Work in 

P-to-P,” American Banker, October 15, 2008. 43 Daniel Wolfe, “Prosper, Forming Secondary Market, Halts Applications,” American Banker, October 16, 2008; and Daniel Wolfe, 

“Prosper to Open Secondary Market to Bank-Issued Loans,” American 

Banker, December 8, 2008. 

be aware of and adhere to applicable laws, regulations, 

supervisory policies, and sound business practices 

related to consumer protection and safety and soundness. Banks that have questions about, or are considering engaging in AFS directly or through third-party 

arrangements, are encouraged to contact their regulator. 

Authors: Christine Bradley, Senior Policy Analyst 

cbradley@fdic.gov 

Susan Burhouse, Senior Financial Economist 

sburhouse@fdic.gov 

Heather Gratton, Senior Financial Analyst 

hgratton@fdic.gov 

Rae-Ann Miller, Special Advisor to the Director 

rmiller@fdic.gov 

The authors wish to thank Luke Reynolds, Chief, Outreach 

and Program Development Section, Division of Supervision 

and Consumer Protection, FDIC; Martha Solt, Senior 

Economist, Division of Insurance and Research, FDIC; and 

Donna Tanner, Vice President, and Rosa Rivera, Branch 

Manager, First National Bank of Syracuse, for their contributions to this article. 

FDIC QUARTERLY 47 2009, VOLUME 3, NO. 1