The term “unbanked” applies to an individual or household that doesn’t use a bank or credit union for financial services. An unbanked adult has no checking or savings account, relying instead on alternative financial services to pay for life’s expenses.
While the urge to store cash under a mattress may be strong for some, being unbanked can be both expensive and impractical. The benefits of using a financial institution may well outweigh those of the alternatives. However, many people encounter obstacles when trying to access a bank or credit union. Read on for a closer look at why people become unbanked, pros and cons of being unbanked, as well as how to open a bank account, even if you’ve had problems with bank accounts in the past.
Key Points
• Unbanked individuals often rely on cash, prepaid debit cards, money orders, and check-cashing services instead of traditional banking.
• High fees and no interest on savings make being unbanked costly.
• Lack of funds, distrust of banks, and logistical challenges are common reasons for being unbanked.
• Eliminating banking fees and offering second chance accounts are initiatives to assist the unbanked.
• Educational outreach programs are designed to improve financial literacy among unbanked and underbanked populations.
What Does Unbanked Mean?
First, it’s important to give a definition of “unbanked.” If a person is unbanked, that means they are not served by a bank or similar financial institution. If you are over the age of 18 and have no checking account or savings account, you are considered to be an unbanked adult.
You may wonder, how do unbanked adults conduct financial transactions? How do they go about cashing checks and paying bills without a bank account?
Many unbanked individuals deal in cash, whether by their preference or due to their circumstances. In order to conduct everyday financial transactions, they may use cash, check-cashing services, prepaid debit cards, and/or money orders.
Why Do People Become Unbanked?
People become unbanked for various reasons. These can include:
• Lack of money to meet minimum balance requirements at financial institutions
• Lack of the credentials needed to open bank accounts (say, a Social Security number)
• An underlying distrust of financial institutions
• A desire to avoid any fees involved in opening a checking or savings account, or the penalties for incurring a negative bank account balance
• Inability to open an account due to having a previous account closed by a bank or credit union
• Living too far away from a brick-and-mortar banking location or being unable to drive or take transportation to a financial institution
• Lacking a computer, a wifi connection, and/or the tech skills to open an account online.
How Many People are Unbanked in the U.S.?
The United States has a considerable number of unbanked adults. According to the Federal Reserve, 6% adults were “unbanked” in 2022 (their most recent statistic). While that’s a significant number, it’s worth noting that other nations have much larger percentages of unbanked people. The countries with the highest percentage include Morocco, Mexico, Vietnam, Egypt, and the Philippines, all with unbanked populations of 60% or more.
What Are the Types of People Who Are Unbanked?
According to most recently available data from the Federal Reserve, the unbanked population tends to fall into the following demographics:
• Low-income: Families making below $25,000/year are more likely to be unbanked than those who earn more.
• Less-educated: A higher percentage of the unbanked never graduated from high school
• Non-white: Blacks and Hispanics make up the majority of the unbanked
• Women: More females are unbanked than males, possibly because some women don’t view themselves as in charge of household finances, with someone else in the family managing the bank account
• Young people: They tend to be unbanked more often than older adults, possibly because they are college students, without jobs, and lack the financial means or the know-how to open an account. (It’s worth noting that some institutions offer college student bank accounts, which are specially designed to help students begin banking. These can be a useful option.)
What Is the Difference Between Unbanked and Underbanked?
You may also have heard the term underbanked as well as unbanked. An underbanked person typically does have a checking and savings account with an FDIC-insured institution, but regularly relies on alternative financial services. Despite having traditional accounts, they may still utilize check-cashing services, money orders, and short-term payday loans.
The Federal Reserve estimates that 13% of adults in the United States are underbanked. As with the unbanked population, this could be due to a lack of access to banking services, a lack of financial or technical resources to open and maintain an account, a distrust of financial institutions, or having had a previous account closed.
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Initiatives to Help the Unbanked
Being unbanked can make it a challenge for a person to manage their money and build wealth. Fortunately, government programs and some financial entities are working to solve this issue. They are developing new ways to provide incentives and encourage unbanked individuals to choose traditional banking options. These include:
• Eliminating banking fees. Getting rid of minimum balance requirements, monthly account fees, and other financial deterrents can encourage low-income individuals to open an account.
• Developing user-friendly apps and online platforms. Online banking via a computer or phone app can help make it easier for people who don’t have a convenient banking branch or have physical challenges.
• Second chance accounts. Some banks may offer a second chance checking account. When opening this type of account, the bank is willing to overlook bad credit, previously unpaid overdraft fees, or past forced account closures. The account will likely have some limitations, but it can be an on-ramp to a standard checking account.
• Bringing back postal banking. Decades ago, an individual could perform basic banking transactions at their local post office — cashing checks, bill payment processing, sending money to other branches, and issuing modest loans. There is a movement to bring back these services, and some post offices are already offering to cash payroll checks and have the amount put on a debit card for a small fee.
• Educational outreach. Many banks and nonprofit organizations offer financial literacy programs, including workshops and videos, to educate unbanked and underbanked individuals about basic financial concepts, such as how to balance your bank account, budgeting, saving, and credit.
Why Is Being Unbanked a Problem?
Being unbanked can be a problem for a few reasons. For example:
• It can be complicated and time-consuming to conduct banking transactions without having standard bank accounts.
• Being unbanked can be expensive as well. A person may have to pay high fees for check cashing and other services from predatory businesses. Plus, an unbanked individual won’t earn any interest on your money.
• It can be risky to carry cash versus safely keeping it with a bank or credit union.
• Unbanked people may struggle to build wealth and have a solid credit and banking history.
Pros of Being Unbanked
Being unbanked could be seen as a positive for some people. The upsides include:
• Not having to deal with the bureaucracy or paperwork of opening and maintaining accounts at banks
• No checking or savings account fees
• No overdraft or minimum balance fees
• No record of one’s finances, if a person wants that kind of privacy.
• Can be seen as more convenient to use cash vs. using debit cards, ATMs, and bank branches.
Cons of Being Unbanked
As mentioned above, being unbanked can be problematic. Those who don’t have checking and savings account may find that:
• Using prepaid debit cards, money orders, and similar products to pay bills can be costly (fees) and time-consuming.
• Carrying and/or keeping cash at home can be risky; what happens if you are robbed?
• No convenient direct deposit for paychecks. The unbanked may have to utilize a check-cashing or payday loan service, which can charge very high fees or interest rates.
• No opportunity to build up a banking history or possibly a credit history for future borrowing.
• No access to safe and convenient money transfers.
• No opportunity to securely save money for the future.
• No interest earned on your money.
• No access to other products and services that banks may offer when you are a customer, such as cashback programs or better mortgage rates.
Opening a Bank Account
There are many reasons people may shy away from opening a bank account. That said, being unbanked has a number of disadvantages. Your money may not be as secure, and it may be more costly and time-consuming to conduct transactions. What’s more, your funds won’t earn interest and grow.
Opening a bank account can be a very simple process. For most people, what you need is:
• A valid government-issued photo ID
• A Social Security number or taxpayer ID number
• Proof of address.
Then, once you’ve selected a financial institution you trust, it can be fairly quick to complete the sign-up process, whether you do so in person or online. What’s more, there are banks that will allow you to open an account without an initial deposit and that don’t have minimum balance requirements either.
For those who have past banking problems, like having had accounts closed before, a second chance account can be a good move. While it may not be a full-fledged standard account (there are typically limitations, such as no overdraft protection), it can be a positive step towards becoming banked.
By the way, if you previously had an account that’s now shuttered, it’s unlikely that you can reopen your closed bank account. It’s usually best to start over with a new account, at your prior financial institution or elsewhere.
The Takeaway
By choice or circumstance, millions of Americans are unbanked. Typically, this means they don’t have a checking or savings account and don’t participate in personal banking. There can definitely be a downside to being unbanked, including factors like spending more time and money to conduct banking transactions and not earning any interest on one’s funds. For many people, becoming a client of a bank or credit union can be a positive step towards improving their money management and gaining wealth.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What does it mean when a person is unbanked?
A person is considered “unbanked” when they don’t have a checking or savings account at a bank or credit union.
What are the needs of the unbanked?
The unbanked need to hold onto cash securely, pay bills, and transfer funds. Without using the traditional banking system, they are likely to spend more time and pay higher fees and interest rates to conduct basic banking transactions.
How do unbanked people get paid?
Unbanked people can receive funds by cash, a money order, a money transfer service for cash pickup, or by receiving a prepaid debit card.
Photo credit: iStock/Deagreez
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