What Is Unbanked?

"Unbanked" is an informal term for adults who do not use banks or banking institutions in any capacity. Unbanked persons generally pay for things in cash or else purchase money orders or prepaid debit cards. Unbanked persons also typically do not have insurance, pensions, or any other type of professional money-related services. They may take advantage of alternative financial services, such as check-cashing and payday lending, if such services are available to them.

While often an issue in the developing world, there are pockets of unbanked adults in developed countries, including the United States.

Key Takeaways

  • Unbanked refers to adults who do not use or do not have access to any traditional financial services including savings accounts, credit cards, or personal checks.
  • Often concentrated in less developed countries or in poorer regions of developed countries, most of the unbanked in the U.S. did formerly have formal bank accounts.
  • Governments and other organizations have initiated several programs to "bank" the unbanked, such as the FDIC's Money Smart program.

Understanding the Unbanked

Underbanked is a related term that refers to families that prefer to manage their finances through cash transactions instead of more traditional financial services, such as checking accounts, savings accounts, credit cards, and loans.

Although some households are considered unbanked because they do not use banks or financial services at all, the underbanked segment of the population may have checking or savings accounts, but often access less traditional financial products and services, such as short-term payday loans and check cashing services.

An FDIC study revealed that more than 7 million or 5.4% of American households were unbanked in 2019 in the United States. That's compared to 8.4 million or 6.5% of households that were unbanked in 2017—a change of -1.1%. This was the lowest amount of unbanked Americans registered by the survey since it was first conducted in 2009. Households with a family income of less than $15,000 remain the highest unbanked at 23.3%, along with those without a high school diploma at 21.4%.

But the rate of unbanked households varies greatly from one state to the next. The highest rate of unbanked households remains in the South at 6.2%. Unbanked households in the remainder of the country were as follows:

  • 5% in the Midwest
  • 4.9% in the West
  • 4.7% in Northeast

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

Why Persons Become Unbanked

Most unbanked are white, native-born Americans, but many immigrants, legal and illegal, are also unbanked. People can choose to be unbanked for many reasons. Criminals avoid using financial institutions because law enforcement officials can track their actions in their accounts. Older people who survived the Great Depression may have a deep distrust of all financial institutions and therefore do not use them; the same can be true for recent immigrants who experienced banking crises in their countries of origin.

Extremely poor individuals may also have no need for the banking system as they try to survive their day-to-day lives, and they may indeed find that they are unable to maintain minimum balances, afford account fees, or arrange for transportation to and from bank branches during banking hours.

Initiatives to Help the Unbanked

Politicians at the state and federal levels have attempted to help the unbanked gain financial literacy and benefit from banking services. Some such initiatives include former California Gov. 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 to accept identification issued by foreign governments, seeks to help undocumented aliens become banked. The U.S. Treasury Department makes federal payments to unbanked federal benefits recipients using a MasterCard prepaid debit card.