Tracking “Fringe Banking”

Publication: fedgazette, a publication of the Federal Reserve Bank of Minneapolis

Author: Joe Mahon


09/02/2008 - The alternative financial services (AFS) industry has attracted a lot of attention lately. Virtually nonexistent in this country 20 years ago, it has grown into a $100 billion business. Since the mid-1990s, the number of payday lenders nationwide has grown over 10 percent annually.

There's another reason why payday lenders, check-cashing outlets and other types of AFS businesses—also called “fringe banking”—have come under scrutiny: a perception that they're primarily used by people who lack physical access to traditional financial services such as banks and credit unions. Otherwise, why would anyone pay the relatively high fees charged for these services?

A study published in January 2008 by the Brookings Institution, a public policy think tank based in Washington, D.C., examined this notion that AFS exploits the geographically unfortunate. Brookings researchers looked at tract data from the U.S. Census Bureau to compare the locations of AFS providers with those of banks and credit unions. Their findings undermined the idea that AFS customers lack neighborhood access to standard banking services. Over 90 percent of AFS providers are located less than a mile from a bank or credit union branch, for example.

"It's not the case that nonbank financial service firms are filling in a geographic vacuum created from the absence of banks or credit unions," said Matt Fellowes, a researcher now with Pew Charitable Trusts who co-wrote the Brookings study.

Read the full article Tracking "Fringe Banking" on the Federal Reserve Bank of Minneapolis Web site.

Pew is no longer active in this line of work, but for more information visit the Safe Banking Opportunities Project on PewHealth.org.

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