Fringe bank sector growing with support from low income people

Pawnshops, cheque-cashers, rent-to-own operators and payday lenders –fringe banks– have been offering financial services for many years, often to low-income people.

Pawnshops, cheque-cashers, rent-to-own operators and payday lenders – fringe banks – have been offering financial services for many years, often to low-income people.

There is evidence the sector is growing, and it caters to low-income people who are sometimes described as vulnerable consumers – vulnerable because small financial obstacles can cause them major challenges.

To protect consumers from harmful fringe bank practices, all of their services need to be regulated. As well, it’s time regulations were put in place to require mainstream banks to expand their branches into poor neighbourhoods and train their staff to deal with the financial challenges of low-income Canadians. The big banks should also develop products specifically for the benefit of low-income people.


Fringe bank growth is linked to an underlying economic process called financialization (also known as financial innovation), in part driven by new information and communications technologies, leading to a proliferation of financial services and re-shaping consumer motivations toward financial issues.

Financialization can be observed through the proliferation of financial services like fringe banks, but it’s more subtle and possibly more powerful impact is on people’s motivations, which are increasingly driven by financial, not social or even broadly economic interests. Record consumer debt is partly the result of financialization, and this debt leads people to pay greater attention to financial motives to attend to it.

Financialization affects all Canadians and is manifested powerfully with low-income people by the rise of fringe banks. While mainstream financial ​institutions, banks and credit unions are regulated by the government (federal for banks and provincial for credit unions), regulation of fringe banks is uneven.

For instance, fees charged by companies that offer immediate cash upon assisting with one’s income tax return are regulated, as are payday lenders, with respect to fees and other business practices. These two involve different fee caps, and when these caps are converted into an annual percentage rate (APR, an indicator of the cost of credit) they are above the criminal rate of interest of 60 per cent.

Other fringe financial services are not regulated. To protect vulnerable consumers, fringe financial services should be regulated. These regulations should be harmonized across jurisdictions, apply to all types of fringe banks and be regularly updated to ensure that new products are regulated.

Best practice regulations include capping fees at a level that allows for most efficient producers; requiring fair disclosure of fees by using APR and simple language for contracts; identifying and disallowing problematic practices,  such as payday loan rollovers, the rent-to-own industry’s use of inflated retail price; and requiring data disclosure and enforcement of regulations through mystery shopping.

Universal access to banking, financial literacy

Half of Canadians are asset poor, and Canadians generally face record consumer debt. In the face of the process of financialization, the Canadian government must implement a policy to build and maintain household financial security.

Indebted and financially strapped households are not the foundation of a strong economy. It is rather by improving the financial security of middle income households and financially empowering low-income households that the Canadian economy will be strengthened.

The government must name this important principle (financial security) and ensure that other policies are aligned with it. All Canadians require access to fairly priced banking services that present opportunities to improve one’s finances and one’s financial literacy.

Federally regulated banks are profitable, well protected from foreign competition, and, through the Access to Basic Banking (ABB) regulations, are required to open a bank account or cash certain types of federal government cheques for all Canadians with appropriate personal identification.

Yet three per cent of Canadian adults are unbanked, many of these people are low-income, and many more cannot access all the banking services they need. The ABB regulations enshrine the idea of universal bank access but they need to be "beefed up" in order to align the spirit of the law with the letter of the law.

The regulations do not affect bank locations, staff training, or the types of products banks offer or promote. Studies in Winnipeg and Toronto have found bank locations in poorer neighbourhoods over time can be depicted by an ‘X.’ That is, over time mainstream bank branches have tended to be shut down in poor neighborhoods (\) while fringe bank outlets have tended to be opened up there (/).

As a part of their protected and lucrative status, mainstream bank regulations should be put in place to require banks to expand their branches into poor neighborhoods. In addition, and based on neighborhood studies, mainstream banks need to more effectively train their staff to deal with the financial challenges faced by low-income Canadians.

Finally, banks could be more pro-active in developing and promoting bank products for low-income people. This could include a basic bank account, a debit card for bill payment, a secured-credit card to establish or repair a credit rating, a matched savings scheme,  information on a range of government entitlement programs (e.g., Registered Education Savings Program, Canada Child Tax Benefit, Income Tax Refunds, and Guaranteed Income Supplement ), and offer opportunities for financial learning. Programs to build financial inclusion could be funded from bank taxes or government could require the bank to demonstrate their contribution to financial inclusion to maintain their charter status.

Fringe banks offer only services that meet immediate need by accessing small amounts of cash, whereas mainstream banks offer these and other financial services such as savings, investment, and credit building that can allow the client to build their finances. The availability of these services gives the mainstream banker the opportunity, and indeed responsibility, to provide "just in time" financial advice.

The evidence is that sound financial advice that meets a felt and immediate need can be more effective than generic financial literacy classes.

We are more motivated to learn when we see an immediate and tangible effect from that learning. Thus mainstream banks should develop a series of materials (pamphlets, web-based tools) useful for low-income clients as they have for middle-income clients.

Jerry Buckland, PhD, Menno Simons College


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