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Updated on Wednesday, May 13, 2020
Unbanked households have no access to a bank account, while underbanked households have at least one account but also seek financial services outside of the banking sector. In 2017, 6.5% of U.S. households — approximately 8.4 million households — were unbanked, and another 24.2 million were underbanked, per the latest FDIC National Survey of Unbanked and Underbanked Households.
While our checking and savings accounts are a perk that many of us may take for granted, there are several reasons why millions of American households cannot or will not participate in the banking industry.
- What does it mean to be unbanked?
- Who are the unbanked?
- Why people are unbanked
- The risks of being unbanked
- Banking the unbanked
What does it mean to be unbanked?
If you are unbanked, you don’t have an account at an insured institution. This means no checking account or savings account and all the perks that come with it, including debit cards, checks, the ability to make online payments, interest earned on your savings and a safe place to stash your cash.
As of 2017, per the latest installation of the Federal Deposit Insurance Corporation’s (FDIC) National Survey of Unbanked and Underbanked Households, the percentage of unbanked Americans was at an all-time low since the first survey in 2009. Still, 8.4 million U.S. households remain left out of safe and convenient banking services.
Unbanked vs. underbanked
Those who are underbanked have at least one account at an insured institution, but also use financial products or services outside of the traditional banking system. This includes money orders, check cashing, international remittances, payday loans, refund anticipation loans, rent-to-own services, pawn shop loans or auto title loans.
In 2017, 18.7% of American households were underbanked, which is a 1.2 percentage point drop compared to 2015 (19.9%).
Who are the unbanked?
There are specific demographics that tend to be unbanked more so than others. The FDIC survey shows that unbanked and underbanked rates are higher among the following groups:
- Lower-income households
- Less-educated households
- Younger households
- Black and Hispanic households
- Working-age disabled households
- Households with volatile income
Southern states are also overwhelmingly more unbanked and underbanked than other states, with unbanked rates coming in at 7.8% or more and underbanked rates of at least 21.4%.
While the percentage of unbanked younger households, black households and Hispanic households is on the decline, these households are still unbanked at a much higher rate than the overall unbanked rate in 2017. Unbanked rates are also declining among households where the head of household has some college education or less.
Meanwhile, other households aren’t seeing much improvement. Among working-age disabled households, volatile-income households, Gen X households and baby boomer households, unbanked rates have actually increased slightly.
In contrast, underbanked rates are declining across all demographics. The groups that have seen the biggest changes are households with family incomes of less than $15,000, Asian households and working-age disabled households.
Why people are unbanked
There is a wide spread of reasons why households are unbanked. Unfortunately, the most popular reason cited by unbanked households in the FDIC’s survey for being unbanked is that they do not have enough money to keep in a bank account — 52.7% of respondents indicated this as a reason for not having an account, and 34% cited this as the main reason they don’t have an account. Traditional banks tend to impose minimum balance requirements that potential customers must meet to even qualify for an account. Minimums can range from around $25 to $25,000, but even $25 can be a lot to stash in an account for a family living paycheck to paycheck.
It is worth noting that the second- and third-most common reasons unbanked households gave were because they distrust banks and because avoiding banks gives them more privacy. Certainly, households have reason to distrust banks, given their high fees and their role in the financial crisis of 2008. Avoiding banks also allows consumers to keep their personal information at least somewhat off the grid and eliminates the risk of online account numbers and information being stolen.
The fourth-most common reason that households cited for being unbanked is that account fees were too high. Unfortunately, fees are all too common, especially with traditional banks. Simple checking and savings accounts often have monthly maintenance fees that typically range from $5 to even $20 — and this is just to keep your money safe with the institution.
Folks also may run into fees for ATM usage, debit card replacement, paper statements, incoming and outgoing wire transfers and so on. The overdraft fee, which often runs around $37, can dig people deeper into a financial rut, as they’re being asked to pay an additional fee when they already don’t have enough in their account to cover a purchase.
The risks of being unbanked
No FDIC insurance: Unfortunately, not having access to banking services and products puts unbanked folks in a difficult — often dangerous — situation. Keeping your money outside of a bank account leaves it uninsured by the FDIC, which protects your money in case of bank failure. Of course, the potential for bank failure could be a reason so many Americans distrust banks and thus don’t use banks. But millions of unbanked households who are already generally at-risk populations, take on great risk by leaving their money largely unprotected.
Reliance on riskier and more expensive forms of money transfer and payment: Without a bank account, you also lose access to quick and easy bill payment and money transfers. Instead, unbanked populations have to turn to more risky and expensive alternatives like money orders, payday loans and prepaid debit cards. Money orders, for one, require you to already have cash on hand. They’re also limited in the amounts you can send and typically charge an extra fee.
Payday loans are an even riskier option, especially for those who already can’t afford a bank account or other forms of credit. Payday loans allow you to borrow money, which you must then pay back once you receive your next paycheck. These types of loans are typically used by low-income individuals who need the immediate cash to put food on the table or pay bills. It sounds simple enough, but for those who are already living paycheck to paycheck, making a loan payment at the next paycheck isn’t always feasible. Further, payday loans come with astronomical fees and interest rates, often plunging users further into debt.
Exclusion from an increasingly cashless society: In an increasingly technological world, unbanked households also run the risk of being left behind by a potentially cashless future. More and more businesses are going completely cashless, accepting only electronic forms of payment from credit and debit cards to virtual wallets.
Luckily, many states and cities are taking a stand against cashless establishments, as the arrangement inevitably leaves out those who are unbanked. New Jersey, New York, Philadelphia and San Francisco have all passed legislation banning cashless establishments to avoid this exclusionary practice.
Banking the unbanked
Not all those who are unbanked now have always been so. Almost half of unbanked households in 2017 had a bank account at some point in the past, but overwhelmingly cited issues with bank account fees as their reason for becoming unbanked.
While many unbanked people largely intend to continue steering clear of banking institutions — more than half (58.7%) of the unbanked population indicated in the FDIC’s survey that they are not at all likely to open a bank account within the next 12 months — those who are unbanked and open to joining the banking world do have a number of options.
Checking accounts without overdraft fees
If you’re in the unbanked crowd that cannot or will not open a bank account due to fees, there are plenty of fee-free options available to you. Fees may historically be part of the banking experience, but in today’s age, they really don’t have to be.
Checking accounts without overdraft fees, or with more favorable overdraft systems, don’t penalize you for not having enough money in your account and can help you catch yourself and get back on track. These accounts are even better when there’s no monthly fee attached.
Here are our picks for the best checking accounts with free overdraft protection. While they don’t charge you if you overdraft your account, you’ll typically need to have sufficient funds in a linked account at some point. These accounts also don’t charge a monthly fee and don’t require a minimum balance.
Best Checking Accounts With Free Overdraft Protection
|Axos Rewards Checking||No overdraft or NSF fees||Up to 1.25% APY|
|Capital One 360 Checking||Auto-decline or free savings transfer||0.10% APY|
|Ally Bank Interest Checking Account||Free overdraft protection service that transfers funds from account of your choice||Up to 0.25% APY|
|Discover Cashback Debit Checking||Free overdraft protection||None, but 1% cash back|
If you don’t even want to deal with the risk of overdrafting your account, the following accounts simply don’t allow you to do so. There’s no cost for this feature, and they also don’t charge an insufficient funds fee or monthly maintenance fee, nor require a minimum balance.
- Aspiration Spend & Save Account — earns up to 1.00% APY
- Simple Checking Account — earns 0.01% APY
- Chime Spending Account — doesn’t earn interest
Second chance bank accounts
Second chance bank accounts give folks with rocky financial pasts another chance to demonstrate they can bank responsibly. Banks aren’t often likely to approve someone with a history of overdrafts, account closures or bad checks for a new account. Luckily, there are some institutions that are willing to offer these consumers access to banking services and another chance at rebuilding good banking practices.
As protection for taking on this added risk, these institutions tend to implement unwaivable fees. At the very least, there is usually a monthly fee, which makes those accounts a less viable option for those who cannot afford a monthly fee at this time. But if you can prove you’re responsible by paying fees on time and avoiding any issues, you can work your way back up to being fully banked and upgrade to a free account.
Here are some of the best second chance bank accounts out there. We looked for accounts that offer a better deal in terms of fees as well as online and mobile banking access.
Best Second Chance Bank Accounts
Minimum to Open
|People’s Bank Cash Solutions||$4.95||$30|
|Radius Essential Checking||$0||$10|
Community Development Financial Institution (CDFIs)
If you’re unbanked because you can’t afford or are being excluded from traditional banking services, Community Development Financial Institutions (CDFIs) can help. These are certified banks and credit unions that offer bank accounts, loans and other services to low-income and disadvantaged communities.
These institutions are certified and funded by the U.S. Department of the Treasury’s CDFI Fund. Institutions must prove their commitment to serving their communities with their affordable and supportive services. If they pass the CDFI Fund’s requirements, they can become a certified CDFI. To receive funding, the institution must first raise funds itself, which the CDFI Fund will then match, to further support the communities and the individuals within those communities.
CDFIs can help open the door to unbanked populations who are otherwise turned away from traditional banking. Plus, these institutions are heavily community-focused, so you can build a support system around you and create a financial plan with someone in the community.
You can use the CDFI Fund’s Awards Database to find CDFIs and CDFI Fund-awarded institutions in your area.
Are prepaid debit cards a good option?
Although branded as a handy banking alternative, prepaid debit cards aren’t always the best option for unbanked individuals, especially for those who cannot afford traditional banking services because of their fees. Many prepaid debit cards are rife with fees, including for card activation, monthly service, reloading, cash deposits, direct deposits and more.
Unfortunately, unbanked populations use prepaid debit cards at higher rates than underbanked or fully banked populations. In 2017, 26.9% of the FDIC’s respondents were underbanked and using a prepaid debit card, compared to 14.5% of underbanked and 6.7% of fully banked. Prepaid card usage is also higher among lower-income households, less-educated households, younger households, black households, working-age disabled households and households with volatile income — all of which are more likely to be unbanked, as well.
So if you’re not careful, you could end up digging yourself into a worse financial situation than when you started. If you’re considering a prepaid debit card, check and double check the fee schedule before you commit.