Underbanked

Underbanked is a term for people who hold a bank or credit union account yet do not get everything they need from it, and so turn regularly to other providers. A typical underbanked household has a checking account but also cashes checks at a store, buys money orders, sends money through a transfer agent or borrows from a payday or pawn lender. The account exists, but the household's financial life is only partly inside the banking system.

The word is used alongside unbanked, which describes people with no account at all. Together the two groups are the focus of financial inclusion policy. The concept originated in the United States and is most precisely defined there, but it is applied worldwide to people who have an account that they seldom use or that gives them no access to credit, savings or insurance.

The main source in the United States is the household survey conducted every two years by the Federal Deposit Insurance Corporation with the Census Bureau. It classifies a household as underbanked if it has an account at an insured institution and, in the previous twelve months, also used at least one non-bank transaction or credit product of the kinds usually sought by people whose needs banks are not meeting. The list has included money orders, check cashing, international remittances, payday loans, pawn loans, rent-to-own services, tax refund anticipation loans and auto title loans.

In the survey for 2023, about 4 percent of households were unbanked and roughly 14 percent were underbanked. The exact products counted have changed from one survey to the next, so figures are not perfectly comparable over time. Internationally, the Global Findex database of the World Bank Group measures account ownership and also tracks inactive accounts and the use of accounts for saving, borrowing and digital payments, which captures a similar idea.

The pattern in the United States data is consistent. Underbanked status is more common among households with lower or more variable incomes, younger households, Black, Hispanic and Native American households, working-age people with disabilities, and households without a college education. Immigrants who send money abroad and people paid irregularly or in cash are also more likely to fall into the category.

• Speed. A deposited check may be held for days, while a check casher pays immediately for a fee. People living close to the edge of their budget often cannot wait.
• Cost and predictability. An unexpected overdraft fee or a charge for falling below a minimum balance can cost more than the flat price of a money order or prepaid card.
• Access to small credit. Banks rarely lend a few hundred dollars for a few weeks, and people with thin or damaged credit files are declined. Alternative lenders fill the gap at high prices, sometimes amounting to predatory lending.
• Convenience and location. Branch closures, limited opening hours and distance make a nearby store more practical.
• Trust and familiarity. Some customers prefer providers that speak their language, post clear prices and do not penalize small mistakes.
• Product fit. Sending remittances to a family member who collects in cash is often easier through a transfer agent than through a bank wire.

A large part of consumer fintech has been built for this group. The prepaid card, especially the reloadable kind sold in shops, was an early substitute for a checking account. Mobile-first accounts from a challenger bank typically advertise no monthly or overdraft fees and early access to wages paid by direct deposit. Earned wage access lets workers draw pay already earned before payday, and buy now, pay later plans provide small amounts of short-term credit at the checkout.

Banks have responded with low-cost basic accounts that cannot be overdrawn, small-dollar loan programs and faster funds availability. Instant payment systems reduce the waiting that pushes people toward check cashers. A credit union or community development lender may offer alternatives to payday loans. In developing countries, mobile money has reached people whose bank accounts, where they have them, lie unused.

Policymakers treat a high underbanked rate as a sign that mainstream products do not suit many households. Responses include rules on overdraft and other fees, standards for basic accounts, support for real-time payments and the use of rent and utility payment history in credit scoring. Government benefit programs have moved from paper checks to direct deposit and prepaid cards, bringing recipients into electronic payments.

The concept has its critics. Classifying a household by its use of a money order or a remittance service implies that these choices are a problem, when they may be rational given the price, speed and convenience on offer. A single use in twelve months places a household in the category, which may overstate dependence. As non-bank payment apps and fintech accounts spread, the boundary between banked and underbanked has blurred, and surveys have had to revise which products count. Supporters reply that the measure remains a useful indicator of how many people pay more, or wait longer, for basic financial services than they should.

• FDIC National Survey of Unbanked and Underbanked Households
• World Bank: The Global Findex Database