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Alternative finance grows as traditional services shrink

Oct 12, 2013 Sean Albert

Many individuals might think that in the current digital age, a number of processes can be made significantly easier and faster if they don't require interaction with other humans. Think of it this way - isn't going online to buy products a much simpler experience than having to go into the store, dodge other shoppers, locate the item, avoid salespeople asking if you need help, then wait in line?

Some people think that banking now fits into this sentiment - why walk into a branch if you can just take care of your finances on the computer?

However, recent reports have noted that many people still crave human interaction, especially when important things like money are concerned. That being said, traditional banks themselves don't make this too easy - many of them offer online services and install ATMs within storefront locations for faster results. Some are even closing local branches, instead encouraging people to go on the Internet. As such, many are making the decision to become under- or unbanked and skip the process altogether. After all, if these individuals don't have ready access to computers, they have to go out of their way to access the same services as others.

Where alternative finance comes in
According to The Atlantic, this has led a massive number of people to opt out of traditional banks and tap into alternative finance for their monetary needs instead. Short term lenders and others within this industry excel at customer service, which draws many to their companies. This is a big reason why 17 million Americans are now considered unbanked, while 43 million would count themselves among the underbanked population.

The source reported that as banks are becoming less and less popular, the opposite is true of small dollar lenders and check cashers. For example, the latest sector data revealed that the number of short term lenders grew by about $20 billion between 2001 and 2010, the news provider detailed.

The Atlantic goes on to note than unlike many traditional banks, clients of alternative financiers tend to have a personal relationship with representatives, lenders and tellers. This is because they interact with their customers, and the number of these companies is constantly on the rise. Conversely, the news source pointed out, in the South Bronx, there is one bank for every 20,000 residents.

For instance, the news outlet reported that employees at Bronx-based alternative finance business RiteCheck called Nina, a frequent customer, to check on her mother, who had been sick. She told The Atlantic that they were like family.

A misunderstood population
A number of leaders in the financial realm believe that the individuals who are under- and unbanked are forced into this status because they have made fiscal mistakes in the past or were among those who took a big hit during the Great Recession. This, supposedly, is the same class of people who might find traditional lenders' doors closed to them because they don't have perfect consumer credit scores.

However, as The Atlantic pointed out, that's not always true - many are making the conscious decision to forego traditional banking because alternative sources work better for them. Therefore, it would behoove national leaders and experts on Wall Street to start thinking about this population in a different light altogether.

This means many of the false arguments that indicate the short term lending industry takes advantage of consumers are null and void. For example, East Ridge, Tenn., Mayor Brent Lambert told The Times Free Press that many banks simply aren't able or allowed to make unsecured small dollar loans to some individuals, so in many cases, short term lending is these people's only option anyway.