Landscapes of financial exclusion: Alternative financial service providers and the dual financial service delivery system

• Author: Ian M. Dunham
• Date: 01 September 2019
• DOI: http://doi.org/10.1111/basr.12180
• Published date: 01 September 2019

Bus Soc Rev. 2019;124:365–383.

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365

wileyonlinelibrary.com/journal/basr

DOI: 10.1111/basr.12180

ORIGINAL ARTICLE

Landscapes of financial exclusion: Alternative

financial service providers and the dual financial

service delivery system

Ian M.Dunham

© 2019 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc., 350 Main Street, Malden,

MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

Management Department, Center for

Ethical and Sustainable Business,

San Francisco State University,

San Francisco, California

Correspondence

Ian M. Dunham, Management Department,

Center for Ethical and Sustainable

Business, San Francisco State University,

1600 Holloway Avenue, BUS 344, San

Francisco, California 94132.

Email: iandunham@sfsu.edu

Abstract

This research addresses equity in geographic access to

financial services. As financial products and services

continue to become more accessible and affordable, many

low‐ to moderate‐income Americans remain unbanked

and underbanked, relying instead upon informal, alterna-

tive financial service providers, including check cashing

outlets and payday lenders. While geographic access to af-

fordable financial products and services assists in the suc-

cessful asset building strategies of economically vulnerable

households, concerns that access to financial services is un-

even persist. This article uses geographic information sys-

tems and spatial binary logistic regression analysis to test

the hypothesis that sociodemographic characteristics and

mortgage lending variables have a predictive relationship

on the presence of financial deserts—census tracts where

check cashing outlets are more prevalent than banks—in

southeastern Pennsylvania. Results of comparison of means

and regression analysis reveal that these tracts are associ-

ated with higher than average population density, lower

levels of median household income, a higher proportion of

Black and Latinx residents, and higher levels of mortgage

application denial. This article contributes to the ongoing

debate over the emergence of a two‐tiered or dual financial

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DUNHAM

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INTRODUCTION

There is a paradox in America that low‐income consumers tend to pay more for basic financial prod-

ucts and services than their higher income counterparts (Baradaran, 2015; Squires, 2004). Put simply,

it is expensive to be poor. A considerable number of low‐ to moderate‐income (LMI) consumers oper-

ate outside of the mainstream banking system and instead rely on what are referred to as fringe bank-

ing or alternative financial services, including check cashing outlets and payday lenders (Barr, 2012).

According to the U.S. Federal Deposit Insurance Corporation (FDIC), approximately nine million

U.S. households are unbanked, which means they do not maintain a checking or savings account at an

insured financial institution. Approximately 24.5 million U.S. households are underbanked, meaning

they have a mainstream bank account, but also utilized an alternative financial service within the past

year (U.S. Federal Deposit Insurance Corporation [FDIC], 2016).

The alternative financial service industry is controversial. Critics of alternative financial service

providers (AFSPs) raise concerns about the ethical implications of industry practices (Mayer, 2013;

Schwartz & Robinson, 2018; Stearns, Borna, & White, 2006) and offer warnings about the potential

detrimental financial impacts to economically vulnerable consumers (Baradaran, 2015; Barr, 2012;

Caskey, 1994, 2012; Karger, 2005; Servon, 2017). There is also concern that financial service offer-

ings are bifurcated based on socioeconomic status (SES), and prior research observes the emergence

of a two‐tiered (Cover, Fuhrman, & Garshick, 2011; Squires & O'Connor, 1998) or dual (Berry, 2005)

financial service delivery system. While middle‐ and upper income households routinely use main-

stream financial services, many lower income households remain outside of the system and rely on

AFSPs instead. Access to affordable financial products and services is a necessary condition for the

successful asset building strategies of LMI households, while lack of access or reliance on alternative

financial services compounds economic challenges (Barr, 2012; Barr & Blank, 2009).

The potential role that the geography of financial services plays in perpetuating the landscape of

the dual financial service delivery system is a complex quandary. A lack of bank and credit union

(BCU) branches may serve as an impediment to financial inclusion, and prior research addresses the

absence of BCU branch locations in LMI neighborhoods (Avery, Bostic, Calem, & Canner, 1997; Dahl

& Franke, 2017; Ergungor, 2010; Morgan, Pinkovskiy, & Yang, 2017). At the same time, the preva-

lence of AFSPs in LMI neighborhoods perpetuates ongoing questions about the potential targeting of

LMI and minority consumers (Barr, Dokko, Borzekowski, & Kiser, 2012; Barth, Hilliard, & Jahera,

2015; Dunham & Foster, 2015; Graves, 2003; Prager, 2014). There is a concern that the presence of

AFSPs poses a risk to the financial health of LMI consumers (Friedline & Kepple, 2017). Even as new

technology innovations in the financial services sector, including mobile and online banking, become

more ubiquitous, the brick‐and‐mortar geography of the financial services environment will remain

relevant in understanding and promoting financial inclusion (Friedline, 2018).

The fundamental question addressed by this research is the issue of equity in geographic access to

financial services. This article seeks to better understand the relationship between the geography of

brick‐and‐mortar financial services and the characteristics of neighborhoods where AFSPs proliferate.

It is hypothesized that sociodemographic and mortgage lending variables have a predictive relation-

ship on the locations of banking deserts—census tracts where AFSPs are more prevalent than BCUs.

service delivery system, whereby financial products and

services are bifurcated based on socioeconomic status and

geography.