The Unbanked Underbanked and Alternative Financial Services

The Unbanked and Underbanked are often misunderstood as being the same thing, but they're actually distinct groups. In the US, approximately 8.4 million households are unbanked, meaning they have no bank account at all.

The unbanked often rely on alternative financial services like check cashing stores and payday lenders, which can be expensive and predatory. Many unbanked individuals also use prepaid debit cards, which can charge high fees for things like ATM withdrawals.

The underbanked, on the other hand, have a bank account but still rely on alternative financial services due to limited access to traditional banking services or high fees associated with them. In fact, around 24.2 million US households are underbanked, which is about 20% of all US households.

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The unbanked and underbanked are individuals who don't have access to traditional banking services. According to the Federal Reserve report, people who are unbanked or underbanked are more likely to have a low income.

For example, 17% of people with incomes below $25,000 were unbanked, compared to 2% of those with incomes over $50,000. This is a significant disparity, and it highlights the challenges faced by low-income individuals in accessing banking services.

Education also plays a role in determining whether someone is unbanked or underbanked. 34% of people with a high school degree or less were unbanked, compared to 1% of those with a bachelor's degree or more. This suggests that education can be a key factor in accessing banking services.

Racial and ethnic minorities are also disproportionately represented among the unbanked and underbanked. 13% of Black adults and 9% of Hispanic adults were unbanked, versus 3% of White adults, 2% of Asian adults, and 6% of adults overall. This is a concerning trend that highlights the need for greater access to banking services for minority communities.

Here's a breakdown of the demographics of the unbanked and underbanked:

People are unbanked or underbanked for a variety of reasons, including a lack of money, which can be due to unemployment or insufficient income to meet minimum balance requirements. Many individuals simply don't have enough funds to maintain a bank account.

Some people struggle with accessing traditional banking services due to a lack of necessary credentials, such as a social security number. This can be a significant barrier for those who need to open a bank account.

Distrust of financial institutions is another common reason people choose not to use traditional banks. This distrust can stem from prior bad experiences or the opinions of friends and family.

Language or literacy barriers can also make it difficult for people to access traditional banking services, especially if English is not their first language or if they have a low level of literacy. This can create a significant obstacle for those who need to manage their finances.

In some areas, a lack of local access to convenient and affordable banking services can make it difficult for people to bank. This can be particularly challenging for those who rely on in-person banking services.

Some individuals may prefer to use alternative financial services, such as check cashing or payday loans, instead of traditional banking services. This can be due to a variety of reasons, including a lack of knowledge about traditional banking services.

Lastly, some people may be unable to afford the fees associated with maintaining a bank account, such as overdraft fees, ATM fees, and maintenance fees. This can be a significant burden for those who are already struggling financially.

Here are some of the most common reasons people are unbanked or underbanked:

Being unbanked or underbanked can have serious consequences.

According to the FDIC, over 8.4 million households in the United States are unbanked, meaning they don't have an account at a bank or credit union.

These households often rely on alternative financial services, which can lead to high fees and interest rates.

For example, a single payday loan can cost up to $1,300 in fees, which is equivalent to a 390% APR.

This can create a cycle of debt that's difficult to escape.

Underbanked individuals may also struggle with financial planning and budgeting, as they often rely on cash and alternative financial services.

In fact, the FDIC reports that 25% of unbanked households use alternative financial services for everyday expenses.

This can make it harder to save money and achieve long-term financial goals.

Serving the unbanked and underbanked requires a deep understanding of their unique needs and challenges. Financial institutions can start by providing language access and cultural sensitivity, training staff to understand and address the unique needs of different communities.

To simplify the process of opening a new bank account, financial institutions can offer low-cost or no-fee accounts with low or no minimum balance requirement and reduced or waived fees. For example, over 400 banks and credit unions offer a Bank On certified account, which comes with numerous benefits.

Financial education programs and workshops can help educate unbanked and underbanked individuals about basic financial concepts, budgeting, savings, credit, and responsible banking practices. These programs can be organized in collaboration with community-based organizations, nonprofits, and local government agencies.

By offering credit-building programs, financial institutions can help individuals establish or improve their credit scores. These programs can include secured credit cards, credit-builder loans, or credit counseling services.

Providing small-dollar loans and microfinance options can help unbanked and underbanked individuals meet short-term financial needs and build creditworthiness. Mobile banking and digital tools can also enable them to conduct transactions, pay bills, and save money without the need for traditional brick-and-mortar branches.

Here are some benefits of serving the unbanked and underbanked:

By serving the financially excluded, financial institutions can attract new customers, generate additional revenue, and contribute to the financial stability and well-being of local communities.

Fourteen percent of adults used nonbank check cashing or money orders in 2023, down 3 percentage points from 2019. This share was similar to 2022.

Nonbank check cashing and money orders are used by both banked and unbanked adults, but the unbanked were much more likely to have done so, with 33 percent using these services compared to 12 percent of banked adults. The market for financial products and services continues to evolve, particularly in the digital space.

Some people who can't get traditional bank accounts use prepaid debit cards, such as the Green Dot Card, Netspend card, and the Walmart MoneyCard, to make online or other cashless purchases.

Prepaid debit cards and secured credit cards can help individuals build credit and transition from unbanked to banked. Secured credit cards are ideal for people with bad or limited credit, with low annual fees and small minimum deposits.

Here are some common alternative financial services used by unbanked adults:

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Cryptocurrency transactions are recorded on a public ledger called a blockchain, which is maintained by a network of computers around the world. This makes transactions secure and transparent.

The first cryptocurrency, Bitcoin, was created in 2009 by an anonymous individual or group using the pseudonym Satoshi Nakamoto. It's still one of the most widely used cryptocurrencies today.

Cryptocurrency has gained popularity in recent years, with many people investing in it as a way to diversify their portfolios and potentially earn higher returns.

Prepaid Debit Cards are a common way for people without traditional bank accounts to make online or other cashless purchases.

For example, popular options for prepaid debit cards include the Green Dot Card, Netspend card, and the Walmart MoneyCard.

Prepaid debit cards are often used by those who can't get traditional bank accounts, but they may come with higher fees than bank accounts.

It's essential to review the terms of service before signing up for a prepaid debit card to avoid surprise fees.

About 5% of adults used payday, pawn, auto title, or tax refund anticipation loans in 2022, a share that has remained flat in recent years.

These high-cost financial services are more likely to be used by adults with lower self-reported credit ratings. Nearly 1 in 5 of those rating their credit as "very poor" used one of these products, compared to only 1% of those rating their credit as "excellent."

Adults with lower income, Black and Hispanic adults, and those with a disability are more likely to use these services. According to the data, 8% of adults with a family income of less than $25,000 used these services, compared to 1% of those with a family income of $100,000 or more.

Thirteen percent of adults used nonbank check cashing or money orders in 2023, a rate unchanged from 2021 and down 3 percentage points from 2019.

Both banked and unbanked adults used nonbank providers, but the unbanked were much more likely to have done so, with 31 percent of unbanked adults using nonbank money orders or check cashing services compared to 12 percent of banked adults.

Use of nonbank money orders and check cashing has fallen among both unbanked and banked adults since 2019, with a flat trend among banked adults over the past two years.

The market for financial products and services continues to evolve, particularly in the digital space, and people may be substituting away from money orders and check cashing services to other nonbank products and services.

Similar to demographic patterns in bank account ownership, use of nonbank check cashing and money orders was more common among those with lower income, Black and Hispanic adults, and adults with a disability.

High-interest loans are a common financial service used by many people, but they often come with high costs and risks. Five percent of adults used a payday, pawn, auto title, or tax refund anticipation loan in 2022, unchanged from 2021.

These loans are often used by people with lower self-reported credit ratings, with nearly 1 in 5 of those rating their credit as "very poor" using one of these products. Adults with a lower income, Black and Hispanic adults, and those with a disability were also more likely to use these loans.

The use of these loans varies by income level, with 8% of adults with a family income of less than $25,000 using one of these products. In contrast, only 1% of adults with a family income of $100,000 or more used one of these loans.

Here is a breakdown of the percentage of adults using payday, pawn, auto title, or tax refund anticipation loans by income level:

It's worth noting that the use of these loans was much higher among those who did not have a credit card (11%) than among those who did (3%).

Payment options and services are crucial for individuals who are unbanked or underbanked. Fourteen percent of adults used nonbank check cashing or money orders in 2023, with 33 percent of unbanked adults using these services compared to 12 percent of banked adults.

The use of Buy Now, Pay Later (BNPL) services has also become popular, with 14 percent of people using BNPL in the prior 12 months. This option allows consumers to pay for a purchase with a small number of equal payments without being charged interest.

Here are some key statistics on the use of nonbank check cashing and money orders:

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Each branch has a dedicated team of experts ready to assist you with your payment and financial needs.

Branches are open Monday through Friday from 9am to 5pm, and some are open on Saturdays from 10am to 2pm.

Our branches offer a variety of services, including cash withdrawals, bill payments, and money transfers.

You can also use our online services to locate a branch near you and plan your visit in advance.

Our online branch locator tool allows you to search by zip code, city, or state to find a branch that suits your needs.

You'll want to be aware of the potential consequences for payments, especially if you're dealing with international transactions. Late payment fees can range from 2% to 5% of the transaction amount.

If you're using a credit card, you may be charged a foreign transaction fee, typically between 1% and 3% of the transaction amount. This fee is usually waived by some credit card providers, especially those catering to international travelers.

Make sure to check your account agreement to see if you're subject to any foreign transaction fees. Some providers may also have a minimum fee, which can range from $2 to $5.

In the case of a payment dispute, you may be required to provide documentation to support your claim. This can include receipts, invoices, or other proof of purchase.

If you're using a payment service like PayPal, be aware that they may hold your funds for up to 30 days in case of a disputed payment.

Non cash services are a vital part of financial inclusion, especially for those who are unbanked or underbanked. Fourteen percent of adults used nonbank check cashing or money orders in 2023, a share similar to 2022 but down 3 percentage points from 2019.

Both banked and unbanked adults used nonbank providers to conduct financial transactions, but the unbanked were much more likely to have done so. Twelve percent of banked adults used a nonbank money order or check cashing service, compared with 33 percent of unbanked adults.

Nonbank check cashing and money orders were more common among those with lower income, Black and Hispanic adults, and adults with a disability. Use among Black adults was particularly high at about 3 in 10.

Here are the specific percentages of nonbank check cashing and money orders by demographic:

Prepaid debit cards are another non cash service that's become increasingly popular, especially for those who can't get traditional bank accounts.

Fourteen percent of people used Buy Now, Pay Later (BNPL) in the prior 12 months, up 2 percentage points from 2022. This option allows consumers to pay for a purchase with a small number of equal payments, often without being charged interest.

The top two reasons for using BNPL were wanting to spread out payments (87 percent) and convenience (82 percent). This suggests that many people use BNPL to make purchases more manageable.

BNPL use was more common among low- and middle-income adults, Black and Hispanic adults, and women. In fact, Black and Hispanic adults were about twice as likely to use BNPL as White or Asian adults.

Most people who used BNPL made their payments on time, but 18 percent were late making a payment, up 1 percentage point from 2022. Late payments were more common among those with lower income, Hispanic adults, and younger adults.

Here are some key statistics on BNPL use by demographic:

These statistics highlight the importance of considering the needs of different demographics when offering payment options.

Credit cards are a common payment option, with 82% of adults having one in 2023. This number has remained consistent over the years, with 82% of adults also having a credit card in 2022.

Most people use credit cards to make payments, but some carry a balance and incur borrowing costs. In fact, 47% of credit card holders carried a balance at least once in the past year. This percentage varies by income level, with middle-income adults being the most likely to carry a balance.

Young adults and those with a disability are less likely to have a credit card. For example, only 65% of adults aged 18-29 had a credit card, compared to 91% of adults aged 60 and over. Similarly, 69% of adults with a disability had a credit card, compared to 84% of adults without a disability.

Credit card usage also differs by race and ethnicity. For instance, 90% of Asian adults had a credit card, followed by 86% of White adults, 74% of Hispanic adults, and 70% of Black adults. While credit card ownership was lower among Black and Hispanic adults, those who did have a credit card were more likely to carry a balance.

Here's a breakdown of credit card ownership and balance carrying by income level:

As you can see, credit card ownership increases with income level, but balance carrying is more common among middle-income adults.

Online banking has made it easier than ever to manage your finances, even if you don't have a traditional bank nearby. You can open a checking or savings account online and start building wealth with a high-yield savings account.

Many online banks have low fees and offer flexible banking options, making them a great choice for freelancers and small business owners. These accounts often have no minimum balances, no overdraft fees, and access to no-fee ATMs.

Some online banks even offer mobile banking apps that allow you to conduct transactions, pay bills, and save money on the go. This is especially useful for those who are always on the move.

If you're looking for online banking options, you can search for "no-fee checking" online to find local and online banking options that fit your needs.

Online banks also offer mobile banking units and pop-up branches, bringing banking services directly to underserved areas. This is a great option for those who don't have easy access to traditional bank branches.

Here are some benefits of online banking:

Becoming banked or underbanked can be a challenge, but there are steps you can take to overcome past money mistakes or spotty credit histories. An individual development account (IDA) can help individuals with low income build assets on the way to financial stability.

One way to become banked is to open a second-chance bank account, which allows you to bypass a poor ChexSystems report and start building a positive credit history. This can be a game-changer for those who have been denied a checking account in the past.

To get a second-chance bank account, you'll need to find a bank that offers this type of account. Some banks may overlook your financial mistakes, giving you a chance to start fresh.

You can request a free copy of your ChexSystems report at least once per year by visiting the ChexSystems website, calling 1-800-428-9623, or downloading and mailing a request form to Chex Systems Inc., Attn: Consumer Relations, P.O. Box 583399, Minneapolis, MN 55458.

Here are the steps to request your ChexSystems report: