Unbanked Individuals: Insights into the Lifestyle, Challenges, and Solutions
AB
Summary:
The concept of being “unbanked” encompasses adults who abstain from traditional financial services, relying on cash and alternative options. This phenomenon is not limited to developing nations, as even developed countries like the United States experience pockets of unbanked individuals. This article delves into the reasons behind the unbanked status, the difference between unbanked and underbanked, regional disparities, initiatives addressing the issue, and the challenges faced by the unbanked population.
What is unbanked individuals?
Unbanked individuals, commonly found globally, are those who deliberately avoid using traditional financial services provided by banks or other institutions. This includes steering clear of savings accounts, credit cards, and personal checks. Instead, they opt for transactions in cash or alternative financial services like money orders and prepaid debit cards. This population often lacks access to essential financial products such as insurance, pensions, or other professional money-related services.
Unbanked individuals might also turn to alternative financial services, such as check-cashing and payday lending, especially when traditional banking services are not readily available or accessible to them.
Unbanked vs. Underbanked
It’s crucial to distinguish between the terms “unbanked” and “underbanked.” While unbanked individuals completely avoid traditional financial services, underbanked individuals, on the other hand, may have checking or savings accounts but frequently rely on alternative financial services like money orders, check-cashing services, and payday loans rather than conventional loans and credit cards to manage their finances.
Unbanked households in the United States
According to a study by the Federal Deposit Insurance Corporation (FDIC), over 7 million American households, representing 5.4%, were unbanked in 2019. This figure marked a decrease from the 2017 estimate of 6.5%. The FDIC study reveals that unbanked rates tend to be higher among specific segments of the population, including households with low, volatile, or no income.
Education and ethnic disparities
Education levels play a significant role in unbanked rates, with individuals without a high school diploma more likely to be without a bank account. Furthermore, an analysis by the Boston Consulting Group using FDIC data indicates that Black and Latinx households are overrepresented among the unbanked. While comprising 32% of the U.S. population, they represent 64% of unbanked households.
Regional disparities are also evident, with the highest rate of unbanked households persisting in the South at 6.2%. Mississippi and Louisiana stand out with the highest rates, while New Hampshire and Vermont boast the lowest instances of unbanked households.
Additionally, the Federal Reserve’s survey in 2020 reported that 5% of U.S. households were unbanked, reinforcing the ongoing challenges in achieving widespread financial inclusion.
Factors leading to unbanked status
The decision to be unbanked can be attributed to several factors, with cost being a primary concern. Individuals who are unbanked often struggle to meet the minimum balance requirements set by traditional banks. In essence, traditional banks may not provide the necessary financial services and products that unbanked populations need.
For example, individuals living paycheck-to-paycheck with low or volatile income may find it challenging to wait for a paycheck to clear at a bank. As a result, they may turn to check-cashing services that provide immediate access to cash, albeit for a fee. In neighborhoods labeled as “bank deserts,” where traditional banking options are scarce, alternative financial services become more common and accessible.
High transaction costs and lack of clarity
High transaction costs, including the time and cost associated with visiting bank branches, inconvenient banking hours, lack of clarity about fees, and the availability of alternative products that offer a more compelling value proposition, have been identified as significant reasons why people choose to be unbanked.
Moreover, distrust in banking institutions is another substantial factor. Historical lending discrimination, especially experienced by Black and Latinx communities, contributes to this skepticism. Predatory lending practices, including subprime mortgages, targeting predominantly Black and Latinx neighborhoods, have fueled distrust. Recent immigrants who faced banking crises in their countries of origin may also lack trust in banks.
Contrary to the assumption that being unbanked is due to financial illiteracy, approximately half of unbanked individuals have previously held a bank account, indicating familiarity with banking services.
The three main reasons people are unbanked, as identified by the FDIC, are:
- Not having enough money to meet minimum balance requirements.
- Not trusting banks.
- Privacy concerns.
Initiatives to help the unbanked
Recognizing the challenges faced by the unbanked population, various state and federal programs have been initiated to improve financial literacy and provide access to banking services. Some notable initiatives include:
- FDIC’s Money Smart program.
- Former California Gov. Arnold Schwarzenegger’s Bank on California Initiative.
- U.S. Treasury Department’s Section 326 regulations, allowing banks and credit unions to accept identification issued by foreign governments.
- U.S. Treasury Department’s federal payments to unbanked federal benefits recipients using a Mastercard prepaid debit card.
Challenges of being unbanked
Being unbanked poses several challenges for individuals, including higher costs associated with alternative financial services. Without a bank account, individuals struggle to generate the data needed to establish creditworthiness. Consequently, when facing emergencies like car repairs or medical bills, payday loans may become the only viable option. These extra costs disproportionately impact families already grappling with financial difficulties.
How many people are unbanked?
The Federal Reserve’s findings reveal that 5% of adults in the U.S. did not have a bank account in 2020. On the other hand, the FDIC, using different criteria, estimated that approximately 7 million or 5.4% of American households were unbanked in 2019.
Who are the unbanked?
According to the FDIC, unbanked rates are typically higher among specific demographic groups. These include lower-income households, less-educated households, Black households, Hispanic households, American Indian or Alaska Native households, working-age disabled households, and households with volatile income.
Frequently asked questions
Can being unbanked affect my credit score?
Being unbanked itself does not directly impact your credit score. However, the lack of a bank account may limit your ability to establish creditworthiness, potentially affecting your credit score when seeking loans or credit.
Are there any benefits to being unbanked?
While being unbanked may provide a sense of independence for some individuals, it comes with challenges, such as higher costs for financial services and limited options during emergencies.
Do unbanked individuals have access to government benefits?
Yes, unbanked individuals can access government benefits. The U.S. Treasury Department, for instance, facilitates federal payments to unbanked federal benefits recipients using a Mastercard prepaid debit card.
How can unbanked individuals establish creditworthiness?
Establishing creditworthiness without a traditional bank account can be challenging. Unbanked individuals may explore alternative credit-building options, such as secured credit cards or credit-builder loans. Additionally, timely payment of rent and utility bills may contribute to building a positive credit history.
Are there specific demographic groups more likely to be unbanked?
Yes, certain demographic groups are more likely to be unbanked. This includes lower-income households, less-educated households, Black households, Hispanic households, American Indian or Alaska Native households, working-age disabled households, and households with volatile income.
What are the risks of relying on alternative financial services?
Relying on alternative financial services, such as check-cashing and payday lending, can come with higher costs and fees compared to traditional banking. Additionally, it may limit the individual’s ability to establish a credit history, leading to challenges in accessing credit during emergencies.
Key takeaways
- Unbanked individuals deliberately avoid traditional financial services, relying on cash or alternative options.
- Distrust in banking institutions, cost barriers, and privacy concerns contribute to unbanked status.
- Government initiatives, including the FDIC’s Money Smart program, aim to improve financial literacy and accessibility.
- Being unbanked poses challenges, such as higher costs for alternative financial services and limited credit options during emergencies.
- Approximately 5% of U.S. adults were unbanked in 2020, with disparities among income levels, education, and ethnic groups.
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