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Unbanked Customers Embrace Alternatives

NEW YORK (TheStreet) -- In the aftermath of the financial crisis, some low-end customers are being pushed out of the traditional banking landscape and into the world of alternative financial services.

Alternative financial services -- or AFS as some industry insiders call it -- has been around for years signified by check cashing stores that charge customers exorbitant fees, payday lenders and even retail layaway programs. Those who are considered underbanked, or even unbanked, include immigrants, low income, teenagers and, of course, those consumers that have been deemed risks by banks.

Retailers including Wal-Mart Stores (WMT) and Sears (SHLD) have long had offerings for the underbanked market.

But there is a new crop of companies looking to take advantage of this growing market and they're doing so with reloadable prepaid cards.

According to the Federal Deposit Insurance Corp.'s study of the unbanked and underbanked, which was published in early 2009, roughly 60 million consumers are not receiving financial services through a bank or credit union.

"More people are leaving banks. People are not being underwritten for credit cards, especially at the bottom end. And so the use of alternative financial services has increased significantly in the last few years," says Arjan Schutte, senior advisor at the Center for Financial Services Innovation, a think tank for expanding access of financial services products to underbanked consumers.

"Even though remittances and check cashing volumes are stable as opposed to growing, there has been tremendous growth in payday loans and there's been tremendous growth in more payroll agnostic, general purpose reloadable cards which can be used as a payroll card," Schutte says.

The organization estimates that underbanked consumers in the U.S. are paying $29 billion a year in fees and interest.

"There is multi-billion opportunity to serve this customer by providing more efficient products and services that we believe can also, if structured well, can actually be lower cost," Schutte says.

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