What Is Unbanked?
Adults who do not utilize banks or financial institutions in any way are referred to as unbanked informally. There are pockets of unbanked adults in affluent nations, including the U.S., even though this problem is often seen in underdeveloped nations.
Knowledge of the Unbanked
Most unbanked individuals pay for goods using cash, money orders, or prepaid debit cards. Additionally, most unbanked individuals need more insurance, pensions, and expert financial assistance. They could use payday loans and check cashing to see if they can access other financial services.
Underbanked vs unbanked
The phrase “underbanked” is similar. It describes families with bank or savings accounts that, rather than using conventional loans and credit cards, often manage their finances using alternative financial services, including money orders, check cashing services, and payday loans.
American families without bank accounts
More than 7 million, or 5.4% of American households, were unbanked in 2019, according to Federal Deposit Insurance Corporation (FDIC) research. This is the lowest number of unbanked Americans since the survey’s inception in 2009. The FDIC projected that 8.4 million, or 6.5% of households, needed more bank accounts in its 2017 assessment.
According to the FDIC, unbanked rates are often excellent among several demographic groups, such as low-income, unstable, or nonexistent families. People without a high school degree were shown to be more likely to be without a bank account, demonstrating the power of education.
The unbanked are disproportionately made up of black and Latinx households, according to a Boston Consulting Group review of FDIC data. Despite making up 32% of the U.S. population, they are responsible for 64% of families without bank accounts.
The percentage of households without bank accounts varies significantly among states. The South has the most significant percentage of unbanked households—6.2%.In the rest of the nation, the unbanked households were as follows:
5% of Midwest households, 4.9% of West homes, and 4.7% of Northeast households
Louisiana and Mississippi had the most significant percentage of households without bank accounts, with 11.4% and 12.8%, respectively. The lowest percentages of households without bank accounts were found in Vermont and New Hampshire, with 0.7% and 0.5%, respectively.
The Federal Reserve (Fed) also conducted a study on household financial service use. Its results showed that in 2020, 5% of American households lacked bank accounts.
Reasons for People’s Unbanking
The FDIC analysis states that the primary cause of unbanking is the financial inability to fulfill minimum balance requirements at banks. Alternatively, traditional banks don’t provide unbanked people access to the financial services and goods they need. For example, someone with a fixed income may be unable to wait for a salary to clear at a bank if they live paycheck to paycheck. They then go to a check-cashing business, which will immediately provide them cash in exchange for a charge.
Such alternative financial services are probably more prevalent and available later in “bank desert” neighborhoods; in other words, they are more practical and accessible than making travel arrangements to and from bank branches during restricted banking hours. Unbanked people have been linked to high transaction costs (such as the time and expense of visiting bank offices, inconvenient hours, unclear charge structures, and other products with a more alluring value proposition).
Mistrust of financial institutions may also be a factor. Unsurprisingly, considering the history of loan discrimination faced by blacks and Latinx people in the U.S. and the persistent disparities, distrust was the second most common reason provided in the FDIC research for being unbanked. For example, subprime mortgages and other predatory loans have targeted communities with a high concentration of black and Latinx residents. It’s possible that recent immigrants who went through banking crises in their home nations don’t trust banks as much.
It’s common to blame people’s lack of understanding of banking products or financial literacy for being unbanked. However, over 50% of those without bank accounts had previously owned one, so they are acquainted with banking offerings.
The Federal Deposit Insurance Corporation (FDIC) lists three primary causes of unbanked individuals:
- We need more funds to fulfill the minimum balance requirements.
- Lack of faith in banks.
- Privacy concerns.
Projects to Assist the Unbanked
Several provincial and federal initiatives have aimed to assist the unbanked in obtaining financial literacy and banking services. Arnold Schwarzenegger, a former California governor, started the Bank on California Initiative and the FDIC’s Money Smart program.
The Section 326 regulations of the U.S. Treasury Department make it easier for illegal immigrants to open bank accounts by allowing banks and credit unions to accept identification from other governments. The U.S. Treasury Department also pays federal benefits to unbanked consumers using Mastercard prepaid debit cards.
Why is it an issue to be unbanked?
It might be unpleasant to be unbanked for several reasons. Alternative financial services like cash-checking and payday loans are substantially more expensive. Moreover, individuals don’t create the data they need to establish creditworthiness without a bank account. Consequently, they may have little choice but to use a payday loan for an unexpected auto repair or medical need. These additional expenses severely harm families already having difficulty making ends meet.
What is the number of unbanked people?
According to data from the Fed, 5% of American adults did not have a bank account in 2020.8. According to the FDIC, which employs different standards, an estimated 7 million, or 5.4% of American households, lacked access to banking in 2019.
Who are they?
According to the FDIC, families with lower incomes, less education, black and Hispanic homes, American Indian or Alaska Native households, working-age handicapped households, and households with variable income often have higher unbanked rates.
Conclusion
- Adults who do not utilize or have access to standard financial services, such as credit cards, savings accounts, or personal checks, are called unbanked.
- The unbanked are often found in less developed nations or in the less developed areas of industrialized nations.
- Insufficient funds, mistrust, and privacy issues are the primary causes of unbanked individuals in the United States.
- Governments and other institutions have launched numerous initiatives to “bank” the unbanked. One such initiative is the FDIC’s Money Smart program.
