What is unbanked?

Unbanked is an informal term for adults who do not use banks or banking institutions in any capacity whatsoever. Although this is often a problem in the developing world, there are also pockets of unbanked adults in developed countries, including the United States.

Key points to remember

  • Unbanked refers to adults who do not use or have access to traditional financial services, including savings accounts, credit cards or personal checks.
  • The unbanked are often concentrated in less developed countries or in the poorest regions of developed countries.
  • Lack of money, trust, and privacy issues are the top three reasons people in the United States are unbanked.
  • Governments and other organizations have launched several programs to “banking” the unbankedsuch as the FDIC’s Money Smart program.

Understanding the Unbanked

Unbanked people usually pay in cash or buy financial orders or prepaid debit cards. Unbanked people usually also lack insurance, pensions, or any other type of money-related professional services. They can take advantage of alternative financial services, such as check cashing and payday loanwhether these services are accessible to them.

Unbanked vs Underbanked

Underbanked is a related term. It refers to families who have verification or savings accounts, but often rely on alternative financial services such as money orders, check cashing services, and payday loans, as opposed to traditional loans and credit cards, to manage their finances .

Unbanked households in the United States

A Federal Deposit Insurance Corporation (FDIC) revealed that more than 7 million or 5.4% of US households were unbanked in 2019 in the United States, which is the lowest recorded since the first survey was conducted in 2009. In its 2017 study, the FDIC estimated that 8.4 million or 6.5% of households were unbanked.

The FDIC said unbanked rates tend to be higher among certain segments of the population, namely low, volatile, or non-existent households. Income. Education may also have an influence, as people without a high school diploma were considered more likely to be without a bank account.

Black and Latino households are overrepresented among the unbanked, according to a Boston Consulting Group analysis of FDIC data. While they make up 32% of the US population, they make up 64% of unbanked households.

The rate of unbanked households varies greatly from one state to another. The highest rate of unbanked households remains in the South at 6.2%. Unbanked households in the rest of the country were:

  • 5% of Midwestern households
  • 4.9% in the West
  • 4.7% in the Northeast

Mississippi and Louisiana were the states with the highest rate of unbanked households, at 12.8% and 11.4%, respectively. New Hampshire and Vermont had the lowest instances of unbanked households at 0.5% and 0.7%, respectively.

The Federal Reserve (Fed) is also conducting a survey of how households use banking services. According to its findings, 5% of US households were unbanked in 2020.

Why people are unbanked

According to the FDIC study, the main reason for being unbanked is cost – those who are unbanked cannot meet the minimum balances required by banks. Another way of looking at it: traditional banks do not provide access to the financial services and products that unbanked populations need. For example, someone living paycheck to paycheck with a very low or volatile income may not be able to wait for a paycheck to clear in a bank. So they turn to a check cashing service, which will provide them with cash immediately, albeit for a fee.

In neighborhoods that are “banking deserts“, these alternative financial services are also likely to be more common and open longer – in other words, more accessible and convenient than arranging transportation to and from bank branches during limited opening hours. These transaction costs high (e.g. time/cost to travel to bank branches, inconvenient hours), lack of clarity about fees and alternative products that offered a more compelling value proposition were all identified as reasons why people are unbanked.

Lack of trust in banking institutions may also play a role. Mistrust was the second leading reason cited in the FDIC study for being unbanked – not surprising given the history of loan discrimination experienced by black and Latinx people in the United States and the persistent inequalities. For example, predominantly black and Latino neighborhoods were targeted for predatory loanincluding subprime mortgages. Recent immigrants who have experienced banking crises in their home country may also lack confidence in banks.

Being unbanked is sometimes attributed to lack of financial knowledge or knowledge of banking products. But about half of the unbanked have ever had a bank account, so they are familiar with banking services.

The top three reasons why people are unbanked are: not having enough money to meet minimum balance requirements; not trusting banks; and privacy concerns, according to the FDIC.

Initiatives to help the unbanked

Various state and federal programs aim to help the unbanked access banking services and financial literacy. Some of these initiatives include former California Governor Arnold Schwarzenegger’s Bank on California initiative and the FDIC’s Money Smart program.

The U.S. Treasury Department’s Section 326 regulations, which allow banks and credit unions accept identification documents issued by foreign governments, seek to help undocumented foreigners become banked. The US Treasury Department also makes federal payments to unbanked federal benefit recipients using a Mastercard prepaid debit card.

Why is being unbanked a problem?

Being unbanked can be undesirable for several reasons. Alternative financial services, such as cash checking services and payday loans, are much more expensive. Also, without a bank account, people don’t generate the data they need to establish their creditworthiness. So when it comes time to cover an emergency car repair or medical bill, a payday loan may be their only option. These additional costs significantly harm families who are already struggling to make ends meet.

How many people are unbanked?

The Fed found that 5% of adults in the United States did not have a bank account in 2020. The FDIC, which uses different criteria, said about 7 million or 5.4% of US households were unbanked in 2019.

Who are the unbanked?

The FDIC reports that unbanked rates are generally higher among low-income households, less educated households, black households, Hispanic households, Native American or Alaska Native households, working-age households with disabilities, and households with volatile income.

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