Photo: Flickr / StephenMcleod
According to a recent survey, Millennials have a tendency toward alternative financial services regardless of their income level. Young people earning less than $25,000 a year use check-cashing services as frequently as those who earn $50,000-$75,00, according to the survey, which, it warrants mentioning, was conducted by a provider of web-based alternative financial tools, Think Finance.
Think Finance, in a survey of just 640 people aged 18-34, all of whom have used an alternative financial product in the past year, found some similarities in usage across income levels. Of course, it’s important to point out, they surveyed no one who made more than $75,000.
What the survey found is that prepaid debit cards, check-cashing services, rent-to-own stores, and pawn shops are used by Millennials in roughly equal proportion, no matter what their income level. A full 51 per cent of respondents said they used prepaid debit cards in the last year, in both the under $25,000 group and in the $50,000-$74,999 group. A different survey, by the National Foundation for Consumer Credit Counseling, estimated that 13 per cent of Americans use prepaid debit cards regularly. Think Finance could not be reached for comment on its methodology.
“Stereotypes that paint users of alternative financial products as poor and uninformed are simply not accurate,” said Ken Rees, CEO of Think Finance, in prepared remarks. Think Finance’s study, he said, demonstrates that young people of all income levels “have a need for the convenience, utility and flexibility that alternative financial services provide.” He later extolls the virtues of emergency cash products, which according to Think Finance’s survey, are actually used more frequently by those in the higher income bracket (22 per cent) than those in the sub-$25,000 bracket (15 per cent).
Not coincidentally, perhaps, Think Finance offers payday loans in a number of states through a product called PayDayOne. In Texas, for example, PayDayOne’s $1,200 14-day payday loan comes with $298 in fees and interest — an effective APR of 648.74%. To its credit, PayDayOne is very straightforward about the fees and interest it charges on these short-term loans: all this information is available in clear fashion on its website.
Another product Think Finance offers, called Presta, is a rent-to-own service for high tech products. After 12 months of renting a good, you own it outright. You can own an iPad 2 16GB for just $17 a week. That sounds attractive unless you consider that Apple’s price for the product is $399 — about 23 weeks’ payments. At the end of 52 weeks using Presta, you’ll have paid $884 for a product that costs less than half that: an effective APR of more than 100%. To be clear, however, Presta charges no interest, just a weekly rental rate that effectively finances the purchase of products at exorbitant rates. Young people would need to search high and low for a credit card that charges so much. That said, for a short-term rental, the service seems fair: it’s risky to lend out iPads, as anyone with an iPad knows.
Gen Y and alternative financial products
More to the point, however, is this: alternative financial products, no matter how transparent the web can make them, still cost more money than traditional ones. No bank will issue a credit card with a 100% APR; no bank would issue short term loans with a 650% APR. This is not the sort of business that attracts repeat customers unless they simply have no other choices. Think Finance bills itself as more convenient and transparent than its predecessors, which is certainly true, but it does not help young people grow their wealth. For that, only saving and investing will do.
Alternative financial products have gained ground in recent years, most notably reloadable prepaid debit cards. Once known for its steep fees, better established card issuers like Chase and American Express have stepped into the prepaid market, providing lower-cost options to consumers who either can’t afford a checking account or prefer the control a prepaid card offers.
But this shift in the industry has been slow, about as slow as federal regulators. Turns out, the CFPB will be holding a hearing on May 23 in Durham, N.C., on the topic of prepaid cards, reports Bank Credit News, which means that the industry might face increased scrutiny from regulators. Sounds like it might be too little too late, but that wouldn’t be anything new from federal regulators.
Education, in this regard, is more important than regulation. That USA Today reported Think Finance’s survey without even taking a look at its methodology or questioning its ability to be impartial about a study like this speaks to the problem at play here. People assume that young people, with their smartphones and jaded attitudes, are simply too cool and fast-moving for traditional banking products. We’ll never save a dime if people keep telling us this is the case.
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