What Does Underbanked Mean?
Underbanked refers to individuals or families who have a bank account but often rely on alternative financial services such as money orders, check-cashing services, and payday loans rather than on traditional loans and credit cards to manage their finances and fund purchases. This may be because they lack access to convenient, affordable banking services or because they need or prefer to use alternatives to traditional financial services.
Key Takeaways
- Underbanked households often rely on cash and alternative financial services, as opposed to credit cards and traditional loans, to fund purchases and manage their finances.
- Many underbanked households lack access to affordable banking and financial services.
- According to the Federal Reserve, 13% of U.S. adults are underbanked.
Understanding the Underbanked
The majority of people use banks to conduct routine financial transactions. Banks offer public checking accounts for everyday use to make deposits, withdrawals and transfers, and to pay bills. Savings accounts and other investment vehicles offer consumers a place to store their money and earn interest. Banks also offer consumers a variety of credit facilities such as loans and mortgages.
People who have a bank account but also tap into alternative financial services, such as short-term payday loans, check-cashing services, and prepaid debit cards, are typically referred to as the underbanked. Some households are considered unbanked because they don't use banks or financial services at all.
How Many People Are Underbanked in the U.S.?
According to a 2021 Federal Reserve (FRB) report on the economic well-being of U.S. households, in 2020, 13% of adults in the U.S. were underbanked, while 5% were unbanked. Those results marked an improvement on 2018 when the FRB found that 16% of U.S. adults were underbanked and 6% were unbanked.
The Federal Deposit Insurance Corporation (FDIC) runs its own survey on how households use banking services. The FDIC revealed that an estimated 5.4% of U.S. households were unbanked in 2019, meaning that 94.6% of U.S. households had at least a checking or savings account.
In its 2019 report, the FDIC broke down the financial services activities of the population but, unlike in previous years, stopped short of providing a specific percentage figure of underbanked households. In 2017, the government agency put its estimate of underbanked at 48.9 million adults, or 18.7% of U.S. households, down from 19.9% in 2015.
The FRB and the FDIC's numbers cannot be directly compared as they define the underbanked somewhat differently.
Who Are the Underbanked?
The FRB has stated that both the unbanked and underbanked "are more likely to have low income, less education, or be in a racial or ethnic minority group." Among the underbanked, 21% had a family income of under $25,000 (vs. 5% with incomes over $100,000) and 24% didn't have a high school degree (vs. 8% with a bachelor's degree or more). In terms of race/ethnicity, 27% of Blacks and 21% of Latinx were underbanked vs. 9% of Whites.
When it comes to applying for credit, the FRB survey showed that Americans with incomes under $50,000 per year were much more likely to be denied traditional bank credit than those with incomes over $100,000 (39% vs. 9%, respectively). In every income bracket, Black and Latinx individuals were more likely to experience an adverse credit outcome than White applicants.
Community development financial institutions (CDFIs) provide loans to home buyers and businesses in rural, impoverished, and disadvantaged communities.
The FDIC study came to similar conclusions regarding links between the underbanked and lower-income, lower education levels, and less access to credit. It also explored bill payment methods, finding that 11.9% of households used money orders, 5.5% used cashier’s checks, and 4.9% used bill payment services, such as those offered by Western Union and MoneyGram, to pay their bills.
Both the FRB and the FDIC have found over the years that households with less predictable and more volatile income were more likely to be underbanked than those with a steady paycheck.
What Is an Underbanked Customer?
An underbanked customer is someone who has a bank account but often relies on alternative sources, such as money orders, check-cashing services, and payday loans, to manage finances.
What Is the Difference Between Unbanked and Underbanked?
Underbanked households have a bank account but regularly use alternative financial services. Unbanked households, on the other hand, do not even have a checkingor savings account.
Why Are So Many People Underbanked?
There are lots of possible explanations. An obvious one is that traditional financial services are not always accessible to everyone. For example, banks may have deposit minimums or fees that are a barrier. Or they may have stringent loan criteria, whereas payday loan operators are generally more lenient. Moreover, banks may not advertise their services much, or at least not as aggressively as alternative sources do.
FAQs
The Unbanked and Underbanked
Who is considered underbanked? ›
People who have a bank account but also tap into alternative financial services, such as short-term payday loans, check-cashing services, and prepaid debit cards, are typically referred to as the underbanked.
Why are people underbanked? ›
A lack of money, trust, and privacy concerns are three main reasons why people in the U.S. are unbanked.
What are the characteristics of the underbanked? ›
The underbanked can be characterized by a strong reliance on non-traditional forms of finance and micro-finance often associated with disadvantaged and the poor, such as cheque cashers, loan sharks and pawnbrokers.
What might the term "underbanked" mean in this context? ›
Using the FDIC's definition, a person who is underbanked maintains an FDIC-insured checking or savings account but regularly uses alternative financial services such as payday lending.
How many underbanked are there in the US? ›
Key statistics
The Federal Reserve found that in the U.S., 13% of adults are underbanked as of 2021, meaning they have a bank account but regularly use alternative financial services, and 5% are unbanked meaning they have no bank account at all. The unbanked population is made up of around 13 million people in the U.S.
Who is most likely to be unbanked? ›
Along racial lines, Black (14%) and Hispanic (11%) adults were most likely to be unbanked, compared to 4% of white and Asian adults.
What are the downsides of being underbanked? ›
You'll pay fees for alternative services such as check cashing and prepaid debit cards. Not having a bank-issued debit card can mean you'll need to carry cash, which might not be recovered if lost or stolen. You're missing out on a high-yield savings account, which currently earns a yield that's outpacing inflation.
What is the least secure bank in the US? ›
Bank of America has the most complaints of any bank in the U.S., and also has more one-star reviews on consumer review websites. Customers consider it one of the banks with worst security and report poor customer service, long wait times, excessive fees, and the bank holding their money for no reason.
Is it safer to keep your money in a credit union or a bank? ›
Like banks, which are federally insured by the FDIC, credit unions are insured by the NCUA, making them just as safe as banks.
A cashless society could bring various challenges for the unbanked and underbanked population. This group of people might not have consistent, reliable access to modern financial services or digital technology due to income, location, or other reasons, thus they might rely heavily on cash transactions.
Why are more people unbanked in the south? ›
The southern region of the United States is one of the most diverse regions in the country and home to a significant share of the rural population. Banking deserts are prevalent throughout the southern region, reflective of the absence of bank or credit union branches in local communities.
What were the three most commonly cited reasons to not have a bank account? ›
Among the top 3 reasons, consumers said that not having enough money, high or unpredictable fees, and distrust of banks were reasons they didn't have accounts.
What are some reasons people are underbanked? ›
Unbanked Households: Reasons for Not Having a Bank Account
“Don't trust banks” was the second-most cited main reason for not having an account in 2021 (13.2 percent), and “Avoiding a bank gives more privacy” was the third-most cited main reason (8.4 percent).
Is it underbanked or underserved? ›
Underserved is a term used interchangeably to reflect individuals who are unbanked or underbanked. Financially underserved families and individuals pay a high price for managing their money outside of the digital economy.
Why do you think there are so many Americans who are unbanked? ›
Why are so many Americans unbanked? 49 percent of unbanked Americans say they do not have enough money to use an account. 44 percent of unbanked Americans also cite a lack of trust in banks as an important reason for remaining outside of the formal financial system (respondents could chose more than one answer).
What is an example of being unbanked? ›
A household is considered “unbanked” when no one in the household has a checking or savings account at a bank or credit union. Unbanked individuals use alternative means to manage their money, such as: Prepaid debit cards. Payment services that don't require a bank account, such as PayPal or Venmo.
What is the definition of an unbanked person? ›
Definition of Unbanked
The term "unbanked" refers to adults who do not use banking services many people consider "essential," such as having a checking or savings account or a debit card with a bank or credit union.
Is when someone doesn't have a bank account underbanked people have a bank account but they still rely on financial services? ›
The FDIC calls people without a bank account “the unbanked.” People with a bank account but who primarily rely on alternative services such as check cashing outlets are called “the underbanked.” The latest FDIC data shows almost six million unbanked and 19 million underbanked U.S. households.
Which four are considered nonbank financial institutions? ›
Examples of nonbank financial institutions include insurance firms, venture capitalists, currency exchanges, some microloan organizations, and pawn shops.
