Unbanked is an informal term for adults who do not use banks or banking institutions in any capacity. While often an issue in the developing world, there are also pockets of unbanked adults in developed countries, including the United States.
Key Takeaways
- Definition: Unbanked refers to adults who do not use or do not have access to traditional financial services, including savings accounts, credit cards, or personal checks.
- Concentration: The unbanked are often concentrated in less developed countries or in poorer regions of developed countries.
- Primary Reasons in the U.S.: A lack of money, trust, and privacy concerns.
- Initiatives: Governments and organizations have launched several programs to help unbanked individuals, such as the FDIC’s Money Smart program.
Understanding the Unbanked
Unbanked people generally rely on cash, money orders, or prepaid debit cards for their transactions. Insurance, pensions, or other professional money-related services are typically outside their reach. They often resort to alternative financial services like check cashing and payday lending if such services are available.
Unbanked vs. Underbanked
The term underbanked is somewhat related. It refers to individuals or families who have checking or savings accounts but frequently depend on alternative financial services such as money orders, check-cashing services, and payday loans to manage their finances.
Unbanked Households in the United States
A study by the Federal Deposit Insurance Corp. (FDIC) revealed that more than 5.9 million or 4.5% of American households were unbanked in 2021, the lowest recorded rate since the survey was first conducted in 2009. In 2019, the FDIC estimated that 7.1 million or 5.4% of households were unbanked.
The FDIC noted that unbanked rates tend to be higher among specific segments of the population, such as households with low or volatile income. Education can also be a factor, as those without a high school diploma are more likely to be unbanked. Black and Latinx households are notably overrepresented among the unbanked.
Unbanked households vary dramatically by state. The highest rate of unbanked households is in the South at 4.9%, with Mississippi hitting the highest rate of 11.1%. In contrast, Utah has the lowest rate at 1.2%.
The Federal Reserve also conducts a survey on banking service usage and found that 6% of U.S. households were unbanked in 2022.
Why People Become Unbanked
The primary reason people are unbanked is cost—those who are unbanked often cannot meet the minimum balance requirements for conventional bank accounts. Traditional banks may not provide the services that meet the needs of individuals with very low or volatile incomes who require immediate access to their funds.
In areas described as bank deserts, alternative financial services are often more accessible and convenient, contributing to higher rates of unbanked individuals in those regions. The lack of trust in banking institutions is another significant factor; historical instances of lending discrimination and predatory lending practices have fueled this distrust.
Additionally, while some argue that the unbanked struggle with financial literacy, nearly half of unbanked individuals previously held bank accounts, indicating familiarity with banking services.
Initiatives to Help the Unbanked
Several state and federal programs aim to help unbanked individuals gain access to banking services and financial literacy. These initiatives include former California Gov. Arnold Schwarzenegger’s Bank on California Initiative and the FDIC’s Money Smart program.
Additionally, the U.S. Treasury Department’s Section 326 regulations permit banks and credit unions to accept IDs issued by foreign governments, aiding undocumented immigrants in accessing banking services. Federal benefit payments to unbanked individuals are also made via Prepaid Debit Cards under the Treasury Department’s regulations.
Why Is Being Unbanked a Problem?
Being unbanked often leads to higher financial costs. Alternative financial services, such as cash-checking and payday loans, can be much more expensive. Further, without a bank account, individuals cannot build credit, complicating emergencies like car repairs or medical bills. These additional costs hit the unbanked hard, especially those already financially struggling.
How Many People Are Unbanked?
The Federal Reserve found that 6% of U.S. adults did not have a bank account in 2022. The FDIC, using different criteria, reported that 5.9 million or 4.5% of American households were unbanked in 2021.
Who Are the Unbanked?
According to the FDIC, unbanked rates are often higher among lower-income households, less-educated households, Black and Hispanic households, working-age disabled households, and single-mother households.
Related Terms: underbanked, banking, financial inclusion, payday loans, check-cashing services, FDIC
References
- Federal Deposit Insurance Corp. “2021 FDIC National Survey of Unbanked and Underbanked Households”, Page 1 (Page 7 of PDF).
- Federal Deposit Insurance Corp. “How America Banks: Household Use of Banking and Financial Services: 2019 FDIC Survey”, Page 1 (Page 9 of PDF).
- Federal Deposit Insurance Corp. “How America Banks: Household Use of Banking and Financial Services: 2019 FDIC Survey”, Pages 1–2 (Pages 9–10 of PDF).
- Federal Deposit Insurance Corp. “2021 FDIC National Survey of Unbanked and Underbanked Households”, Page 14 (Page 20 of PDF).
- Boston Consulting Group. “Racial Equity in Banking Starts with Busting the Myths”.
- Federal Deposit Insurance Corp. “2021 FDIC National Survey of Unbanked and Underbanked Households”, Page 16 (Page 22 of PDF).
- Federal Deposit Insurance Corp. “2021 FDIC National Survey of Unbanked and Underbanked Households”, Pages 16–17 (Pages 22–23 of PDF).
- Board of Governors of the Federal Reserve System. “Report on the Economic Well-Being of U.S. Households in 2022—May 2023”.
- Federal Deposit Insurance Corp. “2021 FDIC National Survey of Unbanked and Underbanked Households”, Pages 2 and 19 (Pages 8 and 25 of PDF).
- Center for Responsible Lending. “State Research Shows That Payday Lending Stores Are Heavily Concentrated in African American and Latino Communities Across California”.
- U.S. Department of Justice. “Justice Department Reaches Settlement with Wells Fargo Resulting in More than $175 Million in Relief for Homeowners to Resolve Fair Lending Claims”.
- Federal Deposit Insurance Corp. “2021 FDIC National Survey of Unbanked and Underbanked Households”, Page 17 (Page 23 of PDF).
- Federal Deposit Insurance Corp. “2021 FDIC National Survey of Unbanked and Underbanked Households”, Page 3 (Page 9 of PDF).
- California Legislative Information. “AB-1292 Bank on California Program”.
- Federal Deposit Insurance Corp. “Money Smart”.
- U.S. Department of the Treasury. “31 CFR Part 103”.
- U.S. Department of the Treasury, Bureau of the Fiscal Service. “Direct Express”.
- Federal Deposit Insurance Corp. “2021 FDIC National Survey of Unbanked and Underbanked Households”, Pages 1–2 and 14 (Pages 7–8 and 20 of PDF).
