Unbanked Definition

What Is Unbanked?

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

  • 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.
  • The unbanked are often concentrated in less developed countries or in poorer regions of developed countries.
  • A lack of money, trust, and privacy concerns are three main reasons people in the U.S. are unbanked.
  • Governments and other organizations have initiated several programs to "bank" the unbanked, such as the FDIC's Money Smart program.

Understanding the Unbanked

Unbanked people generally pay for things in cash or else purchase money orders or prepaid debit cards. Unbanked people 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.

Unbanked vs. underbanked

Underbanked is a related term. It refers to families who have checking or savings accounts but often rely on alternative financial services such as money orders, check-cashing services, and payday loans, as opposed to traditional loans and credit cards, to manage their finances.

Unbanked households in the United States

A Federal Deposit Insurance Corporation (FDIC) study revealed that more than 7 million or 5.4% of American households were unbanked in 2019 in the United States, which is the fewest recorded since its survey was first conducted in 2009. In its 2017 study, the FDIC estimated that 8.4 million or 6.5% of households were unbanked.

The FDIC stated that unbanked rates tend to be higher among certain segments of the population, namely households with low, volatile, or no income. Education can also be influential as people without a high school diploma were deemed more likely to be without a bank account.

Black and Latinx households are overrepresented among the unbanked, according to a Boston Consulting Group analysis of FDIC data. While they make up 32% of the U.S. population, they represent 64% of unbanked households.

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% of households 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%, respectively. New Hampshire and Vermont had the lowest instances of unbanked households with 0.5% and 0.7%, respectively.

The Federal Reserve (Fed) also runs a survey on how households use banking services. According to its findings, 5% of U.S. households were unbanked in 2020.

Why People Become Unbanked

The main reason for being unbanked, according to the FDIC study, is cost—those who are unbanked can’t meet banks’ minimum requirement balances. Another way of looking at it: Traditional banks don’t provide access to the financial services and products unbanked populations need. For instance, someone living paycheck-to-paycheck with very low or volatile income, may not be able to wait for a paycheck to clear at a bank. So they turn to a check-cashing service, which will provide cash immediately, albeit for a fee.

In neighborhoods that are "bank deserts," such alternative financial services are also likely more common and open longer hours—in other words, more accessible and convenient than arranging for transportation to and from bank branches during limited banking hours. These high transaction costs (e.g. time/cost to visit bank branches, inconvenient hours), lack of clarity about fees, and alternative products that provided a more compelling value proposition have all been identified as reasons people are unbanked.

Lack of trust in banking institutions can also come into play. Distrust was the second main reason cited in the FDIC study for being unbanked—not surprising given the history of lending discrimination experienced by Blacks and Latinx in the U.S. and the lingering inequities. For instance, predominantly Black and Latinx neighborhoods have been targeted for predatory lending, including subprime mortgages. Recent immigrants who experienced banking crises in their countries of origin may also lack trust in banks.

Being unbanked is sometimes attributed to people’s lack of financial literacy or knowledge of banking products. But about half of unbanked people have previously held a bank account, so they are familiar with banking services.

The three main reasons people are unbanked are: not having enough money to meet minimum balance requirements; not trusting banks; and privacy concerns, according to the FDIC.

Initiatives to Help the Unbanked

Various state and federal programs have been aimed at helping the unbanked gain access to banking services and financial literacy. 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, seek to help undocumented aliens become banked. The U.S. Treasury Department also makes federal payments to unbanked federal benefits recipients using a Mastercard prepaid debit card.

Why Is Being Unbanked a Problem?

Being unbanked can be undesirable for several reasons. Alternative financial services, such as cash-checking services and payday loans, are much more costly. What’s more, without a bank account, people don’t generate the data they need to establish creditworthiness. As a result, when it comes time to cover an emergency car repair or medical bill, a payday loan may be their only option. These extra costs significantly hurt families who are already struggling to make ends meet.

How Many People Are Unbanked?

The Fed found that 5% of adults in the U.S. did not have a bank account in 2020. The FDIC, which uses different criteria, said that an estimated 7 million or 5.4% of American households were unbanked in 2019.

Who Are the Unbanked?

The FDIC says that unbanked rates are usually higher among lower-income households, less-educated households, Black households, Hispanic households, American Indian or Alaska Native households, working-age disabled households, and households with volatile income.

Article Sources
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  2. Federal Deposit Insurance Corporation. "2017 FDIC National Survey of Unbanked and Underbanked Households: Executive Summary," Page 1.

  3. Federal Deposit Insurance Corporation. "How America Banks: Household Use of Banking and Financial Services," Page 10.

  4. Federal Deposit Insurance Corporation. "How America Banks: Household Use of Banking and Financial Services," Page 13.

  5. Boston Consulting Group. "Racial Equity in Banking Starts with Busting the Myths."

  6. Federal Deposit Insurance Corporation. "How America Banks: Household Use of Banking and Financial Services," Page 2.

  7. Federal Deposit Insurance Corporation. "How America Banks: Household Use of Banking and Financial Services (Appendix)," Pages 5–6.

  8. Board of Governors of the Federal Reserve System. "Report on the Economic Well-Being of U.S. Households in 2020 - May 2021."

  9. Center for Responsible Lending. "State Research Shows That Payday Lending Stores Are Heavily Concentrated in African American and Latino Communities Across California."

  10. 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."

  11. Federal Deposit Insurance Corporation. "How America Banks: Household Use of Banking and Financial Services," Page 3.

  12. Federal Deposit Insurance Corporation. "Money Smart."

  13. California Legislative Information. "AB-1292 Bank on California Program."

  14. U.S. Department of the Treasury. "31 CFR Part 103."

  15. U.S. Department of the Treasury. "Direct Express."

  16. Federal Deposit Insurance Corporation. "How America Banks: Household Use of Banking and Financial Services," Pages 1-2.