Unbanked | Definition

Being unbanked and not having a bank account can make it difficult for you to keep track of your money. Thus, it could lead to you having financial difficulties when trying to accumulate wealth over the long term.

Some people take that everyone has a bank account for granted, but that is not the case. In fact, millions of people in the United States don’t have a bank account. Those who do not have a bank account under their name are unbanked.

Unbanked means an individual without a bank account primarily uses cash, and relies on alternative financial services (AFS) such as money orders, payday loans, and prepaid debit cards for their financial needs. Either they don’t have access to a bank or choose not to have a bank account.

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Recommended Read: 5 Signs of Financial Instability

Why Are People Unbanked?

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There are many reasons someone might be unbanked.

1. Lack of Access to Banks

Lack of access to a traditional bank could mean they live in a “banking desert,” which are certain neighborhoods where no banks exist. Another reason could be they don’t qualify for a bank account. Opening a bank account has specific rules and a bankability check through the ChexSystem, which can prohibit some people from accessing bank accounts.

2. Not Understanding How Banks Work

If you don’t understand a bank’s fee system, you can start feeling like you’re getting fees for no reason. So instead of navigating the sometimes complex bank fees, the unbanked may choose to use Alternative Financial Services (AFS), where the costs, though high, are stated upfront.

3. Banks Don’t Meet Their Needs

An unbanked person might need their money fast, or the bank is only open at inconvenient hours. Not being able to get to a bank while they are open is essentially the same as not having access to a bank, leading to some not opening one in the first place.

4. Distrust of Banks

Some people don't trust banks with their money, whether it is due to misunderstanding banks, previous banking trauma, or experiences with unstable banking systems outside of this country. This belief that a bank is not the safest place for their money leads to them being unbanked.

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Who is Unbanked?

According to a survey by the Federal Deposit Insurance Corporation (FDIC), unbanked people tend to be urban lower-income individuals with a higher representation of minority groups. Most especially, lower income puts you at risk of being unbanked. For example, people with incomes exceeding $75,000 used banking credit services 83% of the time, while those with incomes less than $15,000 used them only 29%. Racial and ethnic differences were also noticeable at all levels, with White individuals being banked more than Black and Hispanic individuals.

The Money Wrap-Up: How Being Unbanked Affects Your Finances

Being unbanked can be very detrimental to your long-term financial growth. Since unbanked individuals use check cashing companies, payday lenders, and other alternative financial services, they are subject to high fees and predatory practices that make it hard to accumulate wealth. In addition, not keeping your money in an FDIC-insured financial institution means you can be subject to theft more easily, and not having a checking or savings account makes it more difficult to engage in the economy. 

Becoming financially educated about how banks work and the benefits of using a bank can go a long way toward filling these gaps and helping individuals become fully banked, but other changes to how banks operate to serve these individuals are necessary as well.

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