Unbanked

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 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 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.

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.

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%, 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

People can be unbanked for many reasons. For example, criminals avoid using financial institutions because law enforcement officials can track their actions in their accounts. Older people who survived the Great Depression, meanwhile, may have a deep distrust of all financial institutions and therefore decide not to 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.

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

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, 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 is considered undesirable for several reasons. A key concern is that alternative financial services can be more costly, significantly hurting families who are already struggling to make ends meet. Another angle is that those unbanked have a greater chance of evading taxes without getting caught.

How Many People Are Unbanked?

The Fed claimed 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.

What Type of People Are 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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  1. Federal Deposit Insurance Corporation. "How America Banks: Household Use of Banking and Financial Services," Page 1.

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

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

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

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

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

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

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

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

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