What Does Underbanked Mean?

The term underbanked refers to individuals or families who manage their finances through cash transactions instead of more traditional financial services such as bank accounts, credit cards, and loans. This may be because they lack access to convenient, affordable banking services or because they prefer to use alternatives to traditional financial services.

Key Takeaways

  • Underbanked households often rely on cash and alternative financial services to fund purchases and manage their finances.
  • Although they may not have a relationship with a traditional financial institution, underbanked individuals may have checking or savings accounts.
  • Many underbanked households lack access to affordable banking and financial services.
  • According to a 2017 report from the FDIC, about 8.4 million households in the United States were underbanked.

Understanding the Underbanked

The majority of people use banks to conduct routine financial transactions. Banks offer the public checking accounts for everyday use to make deposits, withdrawals, and transfers, and to pay bills. Savings accounts and other investment vehicles offer consumers a place to store their money and earn interest. Banks also offer consumers a variety of credit facilities such as loans and mortgages.

People who do not use banks and other traditional financial services are typically referred to as the underbanked. These people may not have access to affordable financial services or may prefer not to use them at all. Instead, they may opt to use alternative financial services such as short-term payday loans, check cashing services, and prepaid debit cards.

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.

According to a survey conducted by the Federal Deposit Insurance Corporation (FDIC) conducted in 2017—the most recently available from the FDIC—underbanked households are defined as those that often rely on alternatives to traditional loans and credit cards to fund purchases and manage their finances even though they may have a checking or savings account. Roughly 8.4 million households lacked a relationship with a financial institution. The report showed that number to be steadily dropping—from 7% of all households reported to be underbanked in 2015 to 6.5% in 2017.

The FDIC report noted that households with less predictable and more volatile incomes were likely to be underbanked. The report also suggested that underbanked families tend to use mobile phones almost as much as other families and may benefit from more traditional banking services available via mobile devices.

Because they use mobile phones as much as other families, underbanked households may benefit from mobile banking services.

Special Considerations

The 2017 FDIC study offers some insights as to why underbanked families do not take advantage of traditional banking services. The following are some of the most common findings from the report.

Income and Education

Underbanked households generally have lower incomes. Roughly 21% of households that reported an annual income of $15,000 or less were underbanked, compared to 47.7% that relied on banks and other financial institutions. This is in contrast to households with higher incomes—$75,000 or more. This segment of the population reported only 13.3% being underbanked. Education levels also differed between banked and underbanked families. Only 14.4% of underbanked families reported at least one family member with a college degree compared to 78.3% of families who ere considered fully banked.

Card Usage

Approximately 14.5% of underbanked households reported using prepaid cards as a way to pay for goods and services compared to only 6.7% for those fully banked. Owning a credit card was also reported to be lower with 60% of underbanked households owning at least one credit card compared to nearly 76.3% of fully banked households.

Access to Credit

Underbanked households reported less access to traditional bank credit. Although roughly the same percentage of these households applied for credit from a bank, 6.2% of underbanked households were denied bank credit compared to 1.9% of those fully banked. In fact, more than 13% of underbanked households report being discouraged from even applying for bank credit at all, compared to only 3.3% of fully banked households.

Bill Payments

Routine payment of bills also reveals a pattern for the underbanked population. About 12% of underbanked families used bank money orders or cashier’s checks to pay their bills compared to 3.5% of those fully banked. And more than 24% of underbanked households also used non-bank money orders. Cash was reported as the primary method for paying monthly bills by 26.2% of underbanked families compared to only 9.8% of fully banked families.