Underbanked: What It Is and Who They Are

What Does Underbanked Mean?

Underbanked refers to individuals or families who have a bank account but often rely on alternative financial services such as money orders, check-cashing services, and payday loans rather than on traditional loans and credit cards to manage their finances and fund purchases. This may be because they lack access to convenient, affordable banking services or because they need or prefer to use alternatives to traditional financial services.

Understanding the Underbanked

The majority of people use banks to conduct routine financial transactions. Banks offer public checking accounts for everyday use to make deposits, withdrawals and transfers, and to pay bills. Savings accounts and other investment vehicles offer consumers a place to store their money and earn interest. Banks also offer consumers a variety of credit facilities such as loans and mortgages.

People who have a bank account but also tap into alternative financial services, such as short-term payday loans, check-cashing services, and prepaid debit cards, are typically referred to as the underbanked. Some households are considered unbanked because they don't use banks or financial services at all.

How Many People Are Underbanked in the U.S.?

According to a 2021 Federal Reserve (FRB) report on the economic well-being of U.S. households, in 2020, 13% of adults in the U.S. were underbanked, while 5% were unbanked. Those results marked an improvement on 2018 when the FRB found that 16% of U.S. adults were underbanked and 6% were unbanked.

The Federal Deposit Insurance Corporation (FDIC) runs its own survey on how households use banking services. The FDIC revealed that an estimated 5.4% of U.S. households were unbanked in 2019, meaning that 94.6% of U.S. households had at least a checking or savings account.

In its 2019 report, the FDIC broke down the financial services activities of the population but, unlike in previous years, stopped short of providing a specific percentage figure of underbanked households. In 2017, the government agency put its estimate of underbanked at 48.9 million adults, or 18.7% of U.S. households, down from 19.9% in 2015.

Who Are the Underbanked?

The FRB has stated that both the unbanked and underbanked "are more likely to have low income, less education, or be in a racial or ethnic minority group." Among the underbanked, 21% had a family income of under $25,000 (vs. 5% with incomes over $100,000) and 24% didn't have a high school degree (vs. 8% with a bachelor's degree or more). In terms of race/ethnicity, 27% of Blacks and 21% of Latinx were underbanked vs. 9% of Whites.

When it comes to applying for credit, the FRB survey showed that Americans with incomes under $50,000 per year were much more likely to be denied traditional bank credit than those with incomes over $100,000 (39% vs. 9%, respectively). In every income bracket, Black and Latinx individuals were more likely to experience an adverse credit outcome than White applicants.

The FDIC study came to similar conclusions regarding links between the underbanked and lower-income, lower education levels, and less access to credit. It also explored bill payment methods, finding that 11.9% of households used money orders, 5.5% used cashier’s checks, and 4.9% used bill payment services, such as those offered by Western Union and MoneyGram, to pay their bills.