The Rise of Banking Alternatives

September 06, 2013

One of the trends that I’ve seen with people who don’t have a great credit score and who have experienced some financial setbacks is that banks don’t really want to do business with them and it’s hard for some people to open accounts at major financial institutions.  One of the beautiful things about capitalism is that when there is an unmet need, enterprising business people step in and create a service to meet that need. For this growing area, an unlikely business has stepped in to meet this need…pawn shops!  Yes, that’s right. Pawn shops!

These aren’t the pawn shops that you grew up hearing about though. Today’s pawn shops are becoming quite the financial centers, offering check cashing, loans, credit cards, Western Union, bill paying services… If it sounds like a bank, it’s not by accident.  Other than taking funds for deposit, pawn shops are duplicating many of the basic services of banks for customers who are having trouble integrating into the banking system, and they are being successful with it.

I have mixed emotions about this trend.  I am happy that those who are under-served by the traditional banks have a way to transact the business that they need to transact. I am not as happy that pawn shops are on the leading edge of this and that the fee structure is usually quite a bit higher than the people receiving services could realistically afford. As with many things, there is good and bad in this trend.

What’s encouraging in the fee structure is reading that it isn’t a leading source of revenue. It’s almost being offered as a “loss leader” in order to generate more foot traffic in the stores where people will hopefully buy items that are for sale. Those who use the services appear to not feel like they are being overcharged for them. However, it would be wonderful if these services would report positive data out to the credit reporting bureaus so that the customers could build a more positive credit profile. Perhaps, as the trend grows and attention (which often comes with scrutiny or regulation) continues to be paid to this, there may be an evolution of the service model.

If you aren’t a customer of a traditional bank, what things could you do other than work with your local pawn shop?  (If you have ideas, feel free to add them in the comments section below!)  This article talks about alternatives to banks as places to cash checks, get money orders and transact bank-like business. I see check cashing stores in nearly every shopping center I pass.  Many major retailers (including Walmart) offer check cashing services.  Grocery stores have long offered this service to their customers.  Many people aren’t aware that if the check was written off an account at Bank XYZ, you can go to Bank XYZ and cash the check.   There are a lot of options out there.

And, when there are multiple options, it makes sense to shop around.  Know what services you need or anticipate needing in the future.  Keep your eyes open for multiple places to handle those needs and get pricing from each of them.  When you’re ready, you’ll already know the fees you will face and will be able to make an informed choice.