What Does It Mean To Be Unbanked?

Unbanked Explained in Less Than 5 Minutes

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An individual is said to be unbanked when they do not hold any accounts at a bank or credit union. Households are unbanked when none of their members are bank account holders. While unbanked people do not have accounts like checking, savings, or money market accounts, they often make use of services like check cashing, payday lending, rent-to-own services, and auto title loans.

Many developing countries worldwide have large unbanked populations compared to small numbers in the United States that have steadily decreased over time. Learn how unbanked rates vary across the U.S. and what initiatives are at work to increase banking rates.

Unbanked Definition and Examples

Individuals or households who are unbanked do not access bank credit or other mainstream financial services like checking and savings accounts. They do, however, often use alternative financial services (AFS) like paycheck advances or money orders. The reasons for being unbanked vary, including mistrust of banking institutions and high fees. Mobile banking, which has become ubiquitous for its convenience, has been touted to raise banking rates.

  • Related term: Underbanked

Underbanked describes someone who may have a checking or savings account at a bank but also uses an AFS. These services can be expensive, and they’re often used by individuals with lower incomes. Underbanked individuals are classified as such because bank credit and services do not fully meet their financial needs.

Both banked and unbanked individuals may use services like reloadable prepaid cards to receive direct deposits, make purchases, or withdraw from ATMs. But unbanked individuals do not use debit or credit cards, nor do they have retirement or any other accounts at a financial institution.

If you’re unbanked, you may be missing out on growing your savings. You may also be paying too much money to use other services to do things like cash checks or send money. It’s important to understand and weigh the costs of being unbanked compared with opening a bank account.

Who Is Unbanked or Underbanked?

A 2021 Federal Reserve report on the economic well-being of U.S. households noted that 5% of adults in the U.S. did not have a bank account in 2020, while 13% were underbanked, meaning that they had a bank account but had also used an AFS like a money order or payday loan. Conversely, 81% of adults were fully banked, owned a bank account, and did not use a service like a money order.

The report showed unbanked and underbanked rates were higher among individuals with lower income and less education, though 1% of adults who earned $50,000 or more in 2020 were also unbanked, according to the Fed’s report. It also showed that unbanked and underbanked rates were higher among Black (13%) and Latin Americans (9%) than for White and Asian Americans (both 3%).

Discriminatory lending practices and redlining are just two reasons why underrepresented communities like Black and Latin Americans may still choose to be unbanked or underbanked. This type of discrimination dates back hundreds of years, and it has been seen in recent times. In 2015, Hudson City Savings Bank was ordered to pay more than $27 million in damages, plus a $5.5 million penalty, for redlining. BancorpSouth paid $4 million to redlined neighborhoods in Memphis just one year later.

An earlier study conducted by the Federal Deposit Insurance Corporation (FDIC) in June 2019 found that 5.4% of U.S. households (7.1 million households) were unbanked. The other 94.6% of U.S. households were either fully banked or underbanked.

Unbanked rates were higher among Black, Latin American, American Indian, and Alaskan Native individuals, according to the report. When looking at education level, the report found that only 37.1% of households without a high school diploma used bank credit compared with 87.5% of households with a college degree. According to the FDIC report, the No. 1 reason for not having a bank account in 2019 was because U.S. households were unable to meet minimum balance requirements.

If you’re unbanked because you can’t meet the minimum requirements at a bank, there may be other banking options. For example, Ally Bank and Capital One both offer checking and savings accounts with no minimum balance requirements and no maintenance fees.

The states with the highest percentages of unbanked individuals in 2019—7.6% or more of the local population—included New Mexico, Texas, Oklahoma, Louisiana, Mississippi, Tennessee, Alabama, and Connecticut.

Initiatives To Make Banking More Accessible

Unbanked rates have fallen each year since 2011, but the federal government still has several initiatives to encourage banking among unbanked or underbanked groups. In June 2021, the FDIC announced a “tech sprint” to challenge participating banks to find resources and tools that could encourage more people to bank.

The Financial Literacy and Education Commission offers financial education resources on its website, MyMoney.gov, and via a toll-free hotline, 1-888-696-6639, for those who would like to learn more about ways banking can benefit them.

Some economics experts have proposed ideas for the unbanked, such as finding alternative ways to bank through other government entities like the post office. One 2021 study from researchers at the Federal Reserve and Dartmouth College even found that limiting overdraft fees boosted bank account ownership.

Some nonprofits, including New York-based economic justice group New Economy Project, have also called for expanding consumer protection legislation and banking access for underserved populations, such as people who are undocumented or experiencing homelessness.

Key Takeaways

  • The term “unbanked” refers to adults who do not have accounts at a bank or credit union.
  • An individual who is underbanked may have a bank account but also uses alternative financial services (AFS) like check-cashing or money orders.
  • Unbanked rates have decreased over time, but they still remain higher among underrepresented groups including Black and Latin Americans.
  • The main reason that U.S. households did not have a bank account in 2019 was that they were unable to meet minimum balance requirements.
  • Nonprofits and government entities have challenged banks to make changes that will make it easier for unbanked individuals to bank.