What Does Underbanked Mean?
Underbanked refers to individuals or families who have a bank account but frequently 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 could be due to a lack of access to convenient, affordable banking services or a preference for alternatives to traditional financial services.
Key Highlights
- Underbanked households often depend on cash and alternative financial services, rather than credit cards and traditional loans, to manage their finances and make purchases.
- Many underbanked households lack access to affordable banking and financial services.
- As of 2020, 13% of U.S. adults are considered underbanked, according to Federal Reserve data.
Understanding the Underbanked
Most people use banks to perform everyday financial transactions, such as making deposits, withdrawals, transfers, and paying bills. Savings accounts and other investment vehicles also allow consumers to store their money and earn interest, while banks offer various credit facilities such as loans and mortgages. However, people who have bank accounts but rely on services like short-term payday loans, check-cashing, and prepaid debit cards are identified as underbanked. In contrast, some households are completely unbanked because they don’t use any banks or financial services at all.
Who Are the Underbanked?
The Federal Reserve (FRB) has found that the unbanked and underbanked are more likely to have lower incomes, less education, or belong to racial or ethnic minority groups. For example, 21% of underbanked households had a family income under $25,000, compared to 5% with incomes over $100,000. Also, 24% of underbanked individuals didn’t have a high school diploma, compared to just 8% with a bachelor’s degree or more. In terms of race and ethnicity, 27% of Black individuals and 21% of Latinx were underbanked, compared to 9% of White individuals.
Why Are So Many People Underbanked?
A variety of reasons contribute to why many people remain underbanked. Traditional financial services may not be easily accessible to everyone due to deposit minimums or fees acting as a barrier. Stringent loan criteria dissuade many from seeking bank loans, turning them instead towards payday loan operators who may present more lenient requirements. Furthermore, banks might not advertise their services as aggressively as alternative financial service providers do.
Enhancing Financial Inclusion
Understanding the challenges faced by the underbanked can pave the way for developing solutions that will foster greater financial inclusion. By offering more flexible banking services, lowering fees and deposits, and streamlining loan qualifications, financial institutions can ensure that more people have access to essential financial services. Adoption of technology and banking outreach programs are also valuable strategies that can encourage unbanked and underbanked individuals to utilize traditional banking solutions.
Related Terms: financial inclusion, alternative financial services, community development financial institutions (CDFIs).
References
- Board of Governors of the Federal Reserve System. “Report on the Economic Well-Being of U.S. Households in 2018 - May 2019”.
- Board of Governors of the Federal Reserve System. “Report on the Economic Well-Being of U.S. Households in 2020 - May 2021”.
- Federal Deposit Insurance Corporation. “How America Banks: Household Use of Banking and Financial Services 2019 FDIC Survey”, Page 1.
- Federal Deposit Insurance Corporation. “How America Banks: Household Use of Banking and Financial Services 2019 FDIC Survey”.
- Federal Deposit Insurance Corporation. “2017 FDIC National Survey of Unbanked and Underbanked Households: Executive Summary”, Page 1.
- Board of Governors of the Federal Reserve System. “Report on the Economic Well-Being of U.S. Households in 2018 - May 2019”, Footnote 14.
- Federal Deposit Insurance Corporation. “How America Banks: Household Use of Banking and Financial Services 2019 FDIC Survey”, Page 6.
