Alternative Financial Services Use Among Low- and Moderate- Income Families: Findings from a Large-Scale National Household Financial Survey

Background Use of alternative financial services (AFS), often predatory services provided by non-bank financial institutions, has raised concerns. According to the financial capability framework, individuals need appropriate financial products and the opportunity to act to achieve financial well-being. Lack of access to mainstream financial services among low- and moderate- income (LMI) families may increase AFS use. Research also shows people with low liquid savings are more likely to apply for informal credit, and AFS users are less likely to have precautionary savings. Current strategies to reduce AFS use are limited to financial education or policy regulations and do not differentiate transaction services (e.g., money orders) from credit services (e.g., payday loans).

The Refund to Savings (R2S) Initiative, a national randomized control trial, evaluates techniques informed by behavioral economics to increase deposits of tax refunds into savings products (i.e., savings accounts or bonds). The current study examines predictors of AFS use and whether the R2S intervention reduces AFS use.

Method In the 2013 tax season, TurboTax Freedom Edition users receiving a tax refund were assigned randomly to a control condition or one of 14 treatment conditions that encouraged depositing some of the tax refund into a savings product. Tax filers were invited to take a Household Financial Survey (HFS) immediately after filing (n=20,815) and a follow-up HFS six months later (n=8,324). The TurboTax software collected tax data, including gross income, number of dependents, refund amount, and amount deposited to savings products. The HFS collected detailed information on financial situation and AFS use. Logistic regression was used to examine predictors of the use of AFS, including transactional AFS and credit AFS.

Results At baseline, 41.3% of respondents reported using AFS within the last 12 months. At follow up, 32.5% respondents reported using AFS within the last six months. Having less than a college education, lower gross income, or being of a minority race are associated with AFS use. Financial shocks, such as major vehicle repair or hospitalization, are also associated with AFS use (p<.001, OR=1.34). Having a checking or saving account (p<.001, OR=.35) or credit card (p<.001, OR=.69) is negatively associated with AFS use at follow-up. Checking account balance is associated with less use of credit AFS (p<.05, OR=.91) but not transaction AFS. Savings account balance and cash saved at home are not associated with AFS use.  Although the R2S intervention increased savings among treatment groups (p<.05), the intervention did not significantly impact AFS use.

Implications A large portion of LMI households, especially those without bank accounts, use AFS. Our study reiterates the importance of financial inclusion and expands on previous findings by identifying factors associated with use of different types of AFS. Whether credit cards are a preferable alternative for some AFS users remains to be examined. Policies promoting access to high-quality products, such as regulated small-dollar loans, also may help fulfill the needs of LMI households. Social work practitioners and researchers should consider the different types and functions of AFS to better understand clients’ needs and optimize their financial well-being.