by Ricardo Gutierrez, Sarab Sarung Singh Khalsa, Joshua Low, Elycia Mulholland, and Tom Schumacher

For full report click here

Financial Services (AFS) such as check-cashing, bill payment, and payday loans in order to conduct their financial transactions. These AFS products are typically provided at higher cost than comparable bank products. The market for AFS has grown rapidly over the last twenty years with 2010 estimates equaling $320 billion in transaction volume and $35 billion in fee and interest revenue. There is significant debate on why this rise has occurred and whether or not consumers are better off through AFS use. Consumer advocates claim that AFS providers use predatory tactics and locate specifically in low-income areas and communities of color, trapping those households with high fees and placing them in a negative debt spiral. The AFS industry sees their products as a supplement to traditional banking services, offering products that meet the flexibility, convenience, and demand for liquidity that may otherwise be out of reach for many of their customers. Understanding these dynamics is an important component for policy makers who seek to increase economic opportunity. Particularly in a time of economic uncertainty, a critical question is how to ensure households are able to retain more of their earned money while preserving the access to credit and convenience that meet their needs. The purpose of this report is to evaluate public policy solutions that increase consumer access to mainstream financial options and reduce consumer reliance on expensive AFS in the City of Los Angeles. By reducing AFS use, consumers can divert the funds usually spent on those products towards savings and financial stability. Our client, the ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES, California Reinvestment Coalition, seeks to use this analysis as an advocacy tool to bring about policy change in order to reduce reliance on AFS. The policy solutions we evaluated seek to make improvements to the “financial ecosystem” that supports low-income households. We judge the effectiveness of our proposed policies based on their ability to: 1) reduce costs of financial services; 2) increase access to financial services; 3) promote long-term sustainability for consumers; and 4) maintain operational and political
feasibility. Analyzing our policies with these criteria helps balance improvements in consumer welfare against the feasibility considerations of the financial industry. In order to understand how AFS use affects consumers, we develop an “archetype analysis” of how a typical AFS consumer might behave in their financial transactions. Using this archetype, we gain an understanding of how various public policies might shape the financial life of this individual. For example, we project that by having access to a bank account, our unbanked archetype can save approximately $458 annually. Based on our archetype analysis, data we collected through academic literature reviews, secondary data analysis, consumer focus groups, and stakeholder interviews covering AFS suppliers, consumer advocates, and government program managers, we present the following conclusions to decrease AFS use:
1. Enact legislation in the California State Legislature to clarify information disclosures surrounding
payday loans
2. Lobby local leaders in Los Angeles to include consumer welfare enhancing criteria for the proposed
Banking Development Districts
3. Create an Office of Financial Empowerment in the City of Los Angeles with the specific intent of
reducing AFS use and promoting a healthy financial ecosystem
4. Amend California’s Deferred Direct Deposit Law to mirror policies in the state of Washington
designed to curb use of payday lending