What Does Underbanked Mean?
Let me explain what 'underbanked' really means. It refers to you or your family if you have a bank account but you often turn to alternative financial services like money orders, check-cashing services, and payday loans instead of traditional loans and credit cards to handle your finances and make purchases. This happens because you might not have access to convenient or affordable banking options, or perhaps you prefer these alternatives for your needs.
Key Takeaways
- Underbanked households rely on cash and alternative financial services rather than credit cards and traditional loans to manage finances and fund purchases.
- 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
Most people use banks for routine financial transactions, and I assume you do too if you're reading this. Banks provide checking accounts for deposits, withdrawals, transfers, and bill payments. They also offer savings accounts and investment options where you can store money and earn interest, plus credit facilities like loans and mortgages.
But if you have a bank account and still use alternative services such as short-term payday loans, check-cashing, or prepaid debit cards, you're typically considered underbanked. In contrast, some households are unbanked because they don't use any banks or financial services at all.
How Many People Are Underbanked in the U.S.?
Based on a 2021 Federal Reserve report on U.S. households' economic well-being, 13% of adults in the U.S. were underbanked in 2020, with 5% unbanked. That's better than 2018, when 16% were underbanked and 6% unbanked.
The FDIC conducts its own survey on household banking use. In 2019, they estimated 5.4% of U.S. households were unbanked, meaning 94.6% had at least a checking or savings account. In their 2019 report, the FDIC didn't provide a specific underbanked percentage like before; in 2017, it was 18.7% or 48.9 million adults, down from 19.9% in 2015.
Keep in mind, the FRB and FDIC define underbanked differently, so you can't directly compare their numbers.
Who Are the Underbanked?
The Federal Reserve notes that both unbanked and underbanked individuals are more likely to have low income, less education, or belong to racial or ethnic minority groups. For the underbanked, 21% have family incomes under $25,000 compared to 5% over $100,000, and 24% lack a high school degree versus 8% with a bachelor's or more. By race/ethnicity, 27% of Black people and 21% of Latino and Latina individuals are underbanked, compared to 9% of White people.
When applying for credit, the FRB survey shows that those with incomes under $50,000 are far more likely to be denied traditional bank credit than those over $100,000—39% versus 9%. Across all income brackets, Black and Latino/Latina applicants face more adverse outcomes than White ones.
Community development financial institutions, or CDFIs, provide loans to home buyers and businesses in rural, impoverished, and disadvantaged communities, which could help some underbanked groups.
The FDIC study reaches similar conclusions about links to lower income, education, and credit access. It also looks at bill payment methods: 11.9% of households use money orders, 5.5% use cashier’s checks, and 4.9% use services like Western Union or MoneyGram.
Both the FRB and FDIC have found that households with unpredictable or volatile income are more likely to be underbanked than those with steady paychecks.
What Is an Underbanked Customer?
An underbanked customer is someone like you 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 don't even have a checking or savings account.
Why Are So Many People Underbanked?
There are several reasons why people end up underbanked. Traditional financial services aren't always accessible—banks might require deposit minimums or charge fees that act as barriers. They could have strict loan criteria, while payday lenders are more lenient. Plus, banks might not advertise as aggressively as these alternative sources do.
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