Underbanked | Definition

Being underbanked can be very detrimental to your long-term financial growth. Underbanked services come with high rates, and paying these high rates will make it difficult to accumulate wealth over time. Therefore, if possible, try to implement practical financial habits to improve your chances of bettering your financial position.

Some people assume that everyone has a bank account, but many people that have an account don’t use it. There are millions of people who choose not to use bank accounts. These people are underbanked, but what does it mean to be underbanked? How can someone become fully banked?

Underbanked means an individual has a bank account. But, they primarily use cash, alternative financial services (AFS) such as money orders and payday loans, and prepaid debit cards for their financial needs instead of traditional financial services such as credit cards and debit cards. Many factors lead to someone being underbanked, which are out of the individual’s control.

Why Are People Underbanked?

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There are many reasons someone might be unbanked.

1. Lack of Access to Traditional Banks

When there is a lack of access to traditional banks, it could mean a person is living in a “banking desert.” These are certain neighborhoods where no banks exist--or they don’t have regular access to a bank. Depending on an individual’s ChexSystem Report--a report used to determine someone’s bankability—they might get higher fee bank accounts, making it more difficult to access bank services.

2. Minimum Balances and Fees

Unlike Alternative Financial Services (AFS), banks often have minimum required balances. Many underbanked individuals feel like they can’t meet those requirements regularly and have been hit by so many fees they choose not to use banking services. Instead, they turn to more costly but easily understood AFS.

3. Banks Are Inconvenient

If a person needs their money quickly, and banks are too far or open at an inconvenient time, they may refrain from visiting banks too often. Not being able to get to a bank while they are open is essentially the same as not having access to a bank.

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Who is Underbanked?

By definition, an underbanked person has a bank account but doesn’t always use it. According to a Federal Deposit Insurance Corporation (FDIC) unbanked and underbanked survey, 62% of underbanked individuals use AFS. In comparison, the other 38% use a bank only sometimes. An underbanked individual is generally from a lower income bracket. Racial and ethnic differences were also noticeable at all levels, with White individuals being fully banked more than Black and Hispanic individuals. 

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

Being underbanked can be very detrimental to your long-term financial growth. Since underbanked 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.

Solutions for going from underbanked range from practicing financial habits to making minimum balances more accessible to petitioning your local bank to be open later. Whatever the solution, the financial rewards for being fully banked can make it worthwhile for underbanked individuals.

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