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Does Community Access to Alternative Financial Services Relate to Individuals’ Use of These Services? Beyond Individual Explanations

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Abstract

There is concern that the increasing number of alternative financial services in communities across the USA is risking individuals’ financial health by increasing their use of these high-cost services. To address this concern, this study used restricted-access, zip code data from nationally representative samples of adult individuals and examined associations between the density or concentration of alternative financial services within communities and individuals’ use of these services. The associations between community density and individuals’ use varied by annual household income: Communities’ higher density of alternative financial services was associated with the increased probability that modest- and highest-income individuals ever used these services, while higher density was associated with more chronic use among lowest-income individuals. State regulation that prohibited payday lenders had a protective association for modest- and highest-income individuals but had no effect for lowest-income individuals. Policy implications are discussed.

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Notes

  1. For more information, please visit the FINRA Investor Education Foundation website: http://www.usfinancialcapability.org/

  2. The 5-year time span in which individuals were asked to recall their use of these services created complications for the dependent variable. First, this was complicated because the variables that were used as controls were not all measured with the same time span. In other words, an individual’s 5 years’ worth of alternative financial services use was measured at one time point and at the same time as when the individual reported whether they had experienced a decline in income in the last year. The individual’s alternative financial service use could have occurred 5 years earlier, whereas their decline in income could have been more recent. Second, state regulations for payday lenders changed during this same 5-year recall, suggesting that these regulations likely had a variable relationship with alternative financial service use during this time. We conducted sensitivity analyses in order to address this second complication regarding changes in state regulations.

  3. Another option was to identify states that experienced changes in their payday lending regulations during the 5-year recall of individuals’ alternative financial service use and to test differences in alternative financial services use among bordering zip codes. Others have found that individuals cross state borders to use alternative financial services like payday and auto title lenders and that these services tend to locate near state borders with stronger regulations (Bhutta 2014; Melzer 2011). However, our sample sizes dropped substantially when we restricted individuals to those living in zip codes along state borders where there were changes in regulations. Among the full analytic sample, only 10 % resided in zip codes that bordered states with disparate policies. In addition, the variability in our key variables of interest dropped substantially and the zero-inflated negative binomial (ZINB) models would not converge. While analyzing discontinuities or spatial lag effects of differing policies would provide more rigorous tests of potential causal effects, these methods would require data that are geographically clustered around borders and purposively sampled to provide a variety of conditions regarding exposure to regulations.

  4. As aforementioned, the directions of the signs for the coefficients in the inflate models have been reversed from their original modeling of never having used alternative financial services to ever having used these services.

  5. For more information on ZCTAs, please visit the following Census Bureau website: https://www.census.gov/geo/reference/zctas.html

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  1. School of Social Welfare, University of Kansas, 1545 Lilac Lane, 307 Twente Hall, Lawrence, KS, 66045, USA

    Terri Friedline & Nancy Kepple

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  1. Terri Friedline
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  2. Nancy Kepple
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Correspondence to Terri Friedline.

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Friedline, T., Kepple, N. Does Community Access to Alternative Financial Services Relate to Individuals’ Use of These Services? Beyond Individual Explanations. J Consum Policy 40, 51–79 (2017). https://doi.org/10.1007/s10603-016-9331-y

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