The Link Between Alternative Financial Services Usage and Financial Wellbeing: Evidence from a National Survey

Regardless of the high costs, Alternative financial services (AFS) continue to play a role in the financial lives of many low-to-moderate income American families. Proponents argue that AFS allow families to meet their needs for short-term, small-dollar credit and other financial services which otherwise are inaccessible. Meanwhile, studies have shown that AFS usage is associated with increased debt, decreased homeownership, and increased bankruptcy. Given the prevalence of AFS usage as well as its controversial impact, more research is needed to explicate the relationship between AFS use and the financial wellbeing of U.S. households.

Hypothesis: AFS use increases the likelihood of experiencing low levels of financial wellbeing. Using data from the Survey of Household Economics and Decisionmaking (SHED), this study examined AFS usage and its relationship with household financial wellbeing. The SHED is a national survey of U.S. households and collects data on household financial conditions and decision making.  The working sample of this study was composed of 5,830 American adults who completed survey in 2014.  The dependent variable was financial wellbeing, which was measured by a question:  how well you are managing financially.  Responses include finding it difficult to get by (coded 1), just getting by (coded 2), doing okay (coded 3), and living comfortably (coded 4). The independent variable was AFS usage and was measured with one question that asked respondents whether they used one or more of 6 AFS in the past 12 months.  Socio-demographics and household characteristics were included as control variables.  Ordered logit regression was used to examine whether AFS usage predicts financial wellbeing. 

Results from ordered logit regression show that AFS usage is negatively associated with financial wellbeing, after controlling for sociodemographic and household characteristic variables.  Compared to non-AFS users, AFS users had higher probabilities of finding it difficult to get by (p = .14 v.s. p = .09) and just getting by (p = .32 v.s. p = .25) and lower probabilities of doing ok (p = .40 v.s. p = .45) and living comfortably (p = .13 v.s. p = .21). In addition, financial wellbeing is positively associated with educational attainment, household income, employment, and marital status and negatively related to household size.

The current study expanded upon earlier findings by examining the relationship between AFS and financial wellbeing among the general US population. Findings reveal that a large portion of respondents reported low levels of financial wellbeing, and those who used AFS tended to have lower financial wellbeing levels than their counterparts. This is counter to AFS industry arguments that customers are mostly middle class individuals who experience temporary income shocks. It is unknown whether these findings indicate that AFS usage exacerbates the financial distress of American families or simply that individuals experiencing financial distress use AFS.  Policy makers should enhance monitoring and regulation of this industry profiting on financial vulnerability. At minimum, policies need to require the systematic collection of client data in the AFS industry. Stricter regulations on the amount of interest extracted from struggling families could also be justified.