Access to Banking: What Does Underbanked Mean?

You could be underbanked and not even realize it.

If you’re underbanked, you may find it difficult to:

• Deposit a paycheck and pay your bills

• Get cash from an ATM without being charged a fee

• Access credit

• Build a cushion of savings to weather a financial emergency

Almost 20% of Americans are underbanked or unbanked. That means they don’t have adequate access to banking and financial services. Being underbanked generally makes it harder to get ahead financially.

People from lower-income households are more likely to be underbanked. For a variety of reasons, a larger proportion of Black, Hispanic, and American Indian or Alaska Native households are unbanked or underbanked. 

With fewer options, underbanked people may turn to expensive financial services that are often designed to take advantage of the consumer. That makes it even harder to save for the future, access credit, and build wealth.

What do underbanked and unbanked mean?

Underbanked definition: You have limited access to financial services. For example, you have a bank account, but when you need money, you rely on payday loans..

Unbanked definition: You don't have a bank account or credit card. For example, you might have your wages direct-deposited to a prepaid debit card account. 

You May Like These

A Coronavirus Financial Plan: 5 Steps

Too Much Debt? Identify and Learn the Signs of Too Much Debt

5 Credit Score Factors You Should Know

Reasons people don't have bank accounts

In the FDIC's 2023 survey of underbanked and unbanked households, people gave several reasons for not having bank accounts. These included:

• Unable to meet minimum balance requirements

• Don’t trust banks

• Concerned about high or unpredictable bank account fees 

• Inconvenient bank locations

The survey also shows that about 30% of unbanked households had fallen behind with bill payments in the past. Many of those had turned to payday loans, pawn shops, or buy-now-pay-later services. 

If you're underbanked and struggling with payday loans, it's worth knowing that you don't need a bank account to use debt relief services.

How being underbanked can impact your finances

Being underbanked or unbanked can be inconvenient and costly. You might pay higher fees to access everyday financial services. Plus, building a credit history is difficult. Without a strong credit standing, borrowing will continue to be more expensive. 

Those costs add up. McKinsey estimates the average fees, penalties, and high finance charges for underbanked people comes to $40,000 in their financial lifetime. Not only that, but people who don't have savings or investments miss out on interest and growth.

Here are some of the extra costs you may have to pay if you're underbanked:

• Check-cashing fees: You may have to cash your paycheck at a check-cashing service. Some banks charge a flat fee of around $7 to $10. Others charge a percentage of 1% to 4% or more. Retail stores and check-cashing stores charge similar amounts.

• Money order service fees: You may need to use a money order to pay bills or transfer money to someone else. Fees vary from around $1 to $5 depending on the amount and location. For example, Walmart says it won't charge more than $1. The U.S. Postal Service charges $2.35 for money orders of less than $500.

• Payment apps and prepaid cards: Prepaid cards let you make electronic payments without having a bank account. However, you might have to pay monthly account fees, transaction fees, top-up fees, and more. Many payment apps offer some fee-free transactions, but it's worth checking for hidden fees.

• Excessive loan fees: If you need a small loan to get you through a temporary rough spot, you might have to turn to high-interest options like payday loans. Many of these come from predatory lenders with loans designed to keep you in debt indefinitely.

This leaves the underbanked community with very little left over for an emergency fund, a down payment on a home, savings, or investments. Underbanking could also present obstacles to accessing student loans and getting a college education. Ultimately, it's harder for people who are underbanked to get the traction they need to plan for the future or build wealth. 

What to do if you are underbanked

As we've seen, there are many reasons people may be underbanked and unbanked. Perhaps you're worried about fees and balance requirements. Or, if you've had financial troubles in the past, your application may be denied. 

Distrust of big banks is understandable. However, accessing financial services could save you money on everyday transactions. It could also help you build financial security. Plus, banks have to follow more consumer protection laws than, for example, payment apps.

Here are some options for underbanked consumers to consider.

Check out accounts with no minimum balance requirements

Some banks, particularly online ones, offer accounts with no minimum balance requirements. Look for checking and savings accounts that don't charge monthly maintenance fees. Some also have buffers against overdraft fees, so you won't get dinged if your balance goes below zero.

Online banks can keep costs low since they don't have to pay for brick-and-mortar bank branches and often deal in cash-free transactions.

If you don't have easy access to home internet, mobile banking apps let you manage your money on your phone. Many online and traditional banks now have banking apps, but a mobile-focused account will let you do more. 

Look into a more traditional second-chance account

Second-chance accounts are designed to help you access financial services, even if you’ve had trouble in the past. If a bank is unwilling to let you open an account, a second-chance checking account could give you another shot.

Second-chance accounts often charge monthly fees and may come with restrictions, such as tighter limits on purchases and balances. Once you’ve proven yourself, after a year or so, you can ask to be transitioned into a regular account. Second-chance accounts operate a lot like secured credit cards.

There's a tracking agency called ChexSystems that reports on bank issues, such as bounced checks or closing an account with a negative balance. If you think you've been blacklisted, start by getting a copy of your ChexSystems report to find out why.

Manage your debt without payday loans

If you find yourself in financial hardship, know that payday loans could cause additional long-term pain. There are better ways to borrow money, even if you don't have a bank account. 

Payday loans are relatively short-term loans that usually don't require a credit check. They often charge APRs of around 400%, depending on the state and the amount you borrow. In contrast, personal loans typically charge 10-36%. A cash advance from a credit card typically charges about 36% APR. Try to avoid payday loans and bridge the gap another way.

Why certain communities are underbanked

The lack of physical branch locations can be a major contributing factor in underbanking. A 2023 study by Yale showed that Black households had to travel further to get to a bank and couldn't get the same quality of products.

Certain communities are underbanked because of economics and the intergenerational legacy of racial discrimination in the United States. Unfortunately, the legacy of redlining and the stark wealth gap along racial lines means that many minority neighborhoods aren't considered strong markets for traditional banking services. In other words, it’s a cycle. Minority neighborhoods aren’t considered desirable customers, and have a hard time getting access to the kinds of services that could produce better customers.

Why minorities are more likely to be underbanked

The FDIC research shows that almost 25% of Black households are underbanked or unbanked. Black households are more than five times more likely to be unbanked than White households. 

Regardless of race, being poor—especially when you’re living in an economically depressed neighborhood—means you’re less likely to have access to affordable financial services. 

Fixing this problem requires good faith efforts by state and federal lawmakers, lending institutions, and other stakeholders. We can’t fix generations of financial discrimination overnight, but addressing the problem and discussing ways to overcome these barriers can help underserved communities bridge the gap.

Managing debt with help

It might be that you're having trouble managing your debt. You aren't alone. Common debt relief options include credit counseling, debt consolidation loans, debt settlement, or bankruptcy. 

How Freedom Debt Relief works is that first, we offer a free debt evaluation so that our experts can understand your situation. Then they can explain the options that might make sense in your situation, including the ones we don’t offer.

Don’t let underbanking keep you from reaching your goals

We don’t have all the solutions to the discrimination that affects so many, including those who are underbanked. However, there are ways to protect your financial interests and make the most out of an unfair set of circumstances.

Start by looking for no-fee checking or savings accounts and learning about the consumer protection laws that banks have to follow. If you've had issues with banks before, find a second-chance account. Over time, having a bank account will save you money in fees and contribute to your financial security.