Context

Financial access, or the household use of formal financial services, includes the ability to access transaction, credit, and investment products and services from formal financial institutions. In contrast, households that use Alternative Financial Services (AFS), or products and services from non-bank sources, lack full financial access and are considered financially excluded. Financial access is a necessary component of strong household financial well-being, increasing the likelihood of financial resilience and opportunity. Some researchers discuss the two as opposite sides of the same construct, or ‘‘two sides of the same coin’’ because they are closely related features of one idea. This study considers their distinct differences.

The study

Using national data from the 2015 Financial Capability Study (n = 27,564), this study sought to explore the nature of the relationship between financial access and AFS use using confirmatory factor analysis (CFA) which specifies how observed variables are correlated due to a measurable factor.

Key findings

Confirmatory factor analysis comparing financial access and alternative financial service use reveals:

• household financial access and AFS use are separate concepts that are weakly and positively correlated with one another, suggesting that they are not the inverse of one another, and use of the two is not highly interrelated;
• strong indicators that customer has positive financial access include:
• saving accounts,
  • employer retirement accounts,
  • investments, and
  • mortgage loans;
• use of auto title loans contributes negatively to financial access, and strongly positively to AFS use;
• damaging AFS use is highly correlated with customer participation in:
• pawn shop loans,
  • payday loans, and
  • rent-to-own loans;
• credit cards are strongly negatively related to financial access, meaning access to credit cards does not promote overall household financial access. One possible explanations is that having and using multiple credit cards, or types of credit cards, offers access to credit, but detracts from overall financial access;
• prepaid debit cards contribute negatively to AFS use, which suggests that use of prepaid cards may indicate less consumer use of other indicators of AFS use, such as payday and pawnshop loans;
• checking accounts contribute positively to both financial access and AFS use, although most strongly to financial access, suggesting that while use of checking accounts promotes overall financial access, but can also be indicated by AFS use;
• the determinants of AFS use are complex;
• Social exclusion can create cultural or psychological reasons for voluntary financial exclusion, such as the perception that sophisticated and varied financial products, or products that rely on modern technology are not ‘‘for them’’;

A holistic approach to expanding financial access may be most effective and must include:

• a involves promoting institutions and mechanisms that promote affordable, low-cost, safe, and convenient products and services, such as:
• the Consumer Financial Protection Bureau promotes consumer protection through regulatory and legal action in the formal financial and AFS markets;
  • The CFPB and other federal agencies work with credit unions, banks, and Community Development Financial Institutions to promote and provide low-cost products and services to underserved populations, including bank accounts, savings, insurance, and credit products;
  • to be sustainable, policy and practice efforts focused on banks must also account for the for-profit mandate of banks, wherein they must control risk and costs incurred as part of doing business;
  • governments can expand their role, subsidising free and low cost accounts for low-income consumers, explore postal banking and increase support for mission-driven banks, credit unions and CDFIs,
  • financial technology development can also endeavour to provide more suitable products to underserved communities;

Points to consider

• The project had to utilise confirmatory factor analysis (CFA) as both financial inclusion and AFS use are unobservable factors. This approach seeks to measures of, in this instance financial inclusion, to check consistency with theories explaining the phenomena. This statistical methods relies on multiple observed variables to produce a reliable result;
• A limitation of this study is the possibility that measurement error of financial access and AFS use could alter the indicator of ownership of a bank account (checking or savings), and using AFS, however these findings are consistent with empirical evidence about societal factors which influence financial exclusion;