“Unbanked” and “Underbanked” – American citizens who lack access to secure banking services.
Guest post by John Gower, NerdWallet.com.
From the piggy bank to federal student loans, banks touch the lives of almost every American. Yet, nearly 60 million Americans lack access to secure banking services and/or do not have a bank account. Minorities and immigrants, in particular, often rely on predatory operations to borrow money, cash checks and make other small financial transactions.
The staggering number of unbanked and underbanked indicates a serious shortcoming in our our financial system.
Characteristics of the Unbanked and Underbanked
The Federal Deposit Insurance Corporation (FDIC) defines the underbanked as individuals or businesses lacking access to secure financial services offered by federally insured banks and credit unions. The underbanked represent nearly 20.1 percent of US households – one in five households or roughly fifty-one million adults. The numbers are increasing. The FDIC reported the percentage of unbanked as 18 percent in 2009.
The unbanked, by contrast, do not have bank accounts. Roughly seventeen million American adults – 8.2 percent – are classified as unbanked!
The majority of unbanked and underbanked are non-Asian minorities, lower income households and unemployed households. A high proportion of unbanked individuals surveyed by the FDIC state that they do not have sufficient funds to open an account. Many feel they no longer need an account. Others want to use banking services, but lack geographic access. Unfortunately, there are fewer traditional banking options in low income areas.
Predatory Alternative Banking Services
Rather than use a federally guaranteed bank, nearly 70 percent of the unbanked and underbanked rely on alternative options, such as payday loan operations or funds provided through extended family networks. Alternative services are inherently predatory. They often charge exceptionally high interest rates and/or result in extortion by loan sharks.
The FDIC recommends that banks and financial service providers use mobile applications and software to bridge the physical gap. Furthermore, banks should provide “second chance” checking accounts for customers who encountered trouble with a bank in the past and face difficulty in opening a new account. A few banks offer this service, but not enough.
The unbanked and underbanked represent an increasingly vulnerable population. Reliance on alternative services signals a serious weakness in our financial infrastructure. Yet, it also provides an opportunity for banking institutions to tap into under-served markets.