Access to Banking: What Does Underbanked Mean?

Money sometimes feels stressful. And when you don’t have a bank account or can’t easily use typical financial services, it can be even harder. You could be underbanked and not even realize it.

If you’re underbanked, you may find it difficult to:

• Deposit a paycheck and pay your bills

• Get cash from an ATM without paying fees

• Borrow money

• Build a cushion of savings to weather an unexpected expense

Almost 20% of American households are underbanked or unbanked. That means they don’t have adequate access to banking and financial services. When you’re underbanked, it can be harder to get ahead financially.

Underbanked people have a variety of backgrounds and reasons for having trouble getting bank accounts. People from lower-income households are more likely to be underbanked. For several reasons, a larger proportion of Black, Hispanic, and American Indian or Alaska Native households are unbanked or underbanked. 

Underbanked people have fewer options, which can mean they turn to more expensive types of financial services. Some services for the underbanked are designed to take advantage of consumers. Those costs make it even harder to save for the future, access credit, and build wealth.

What Do Underbanked and Unbanked Mean?

The terms underbanked and unbanked mean having limited or no access to banking services. This can make day-to-day activities more expensive and time-consuming. 

Here’s how the Federal Deposit Insurance Corporation (FDIC) defines underbanked and unbanked individuals:

• Underbanked. You have a checking or savings account, but use other products for many financial activities. For example, you might have a bank account but rely on payday loans when you need extra money.

• Unbanked. You don't have a bank account, and neither does anybody in your household. That could mean you need to get your wages deposited to a prepaid debit card account or use a cash-checking service to receive money. You may rely on money orders and online payment services to pay bills.

Many unbanked and underbanked households find it hard to borrow money from traditional lenders. They may instead turn to payday loans, pawnshops, and car title loans, which are expensive and have heavy fees and high interest rates. Some underbanked households also use Buy Now, Pay Later services.

If you're struggling with debt, you don't need a bank account to use debt relief services. How Freedom Debt Relief works is to start with a consultation. This helps each customer understand their options, regardless of their banking status. 

You May Like These

A Coronavirus Financial Plan: 5 Steps

Too Much Debt? Identify and Learn the Signs of Too Much Debt

5 Credit Score Factors You Should Know

Common Characteristics of Underbanked Households

Education, income, and race all affect people’s access to financial services. It’s harder to maintain a minimum balance when you struggle to pay bills. You may also have to pay overdraft fees.

Government data shows the some common traits of underbanked households:

• Income. Lower-income families tend to have less access to banking products. For example, almost 4 in 10 families with incomes below $15,000 don't have full access to banking. Almost 90% of households earning more than $75,000 a year are fully banked. 

• Income volatility. People whose income changes from month to month tend to be less banked than those with regular paychecks.

• Education. Nearly a quarter of households without a high school diploma are unbanked or underbanked. Almost all people with a college degree are fully banked. 

• Age. Younger people are more likely to be underbanked. Around a quarter of people 15 to 24 don't have a bank account. They may not yet need one, or they use nontraditional financial services.

• Race/ethnicity. Black or Hispanic households may not always have the same access to bank accounts as white households. A higher proportion of American Indian and Alaska Native households are also underbanked.

• Disability. Households with a disability are three times as likely to have no checking or savings account. Compared with households without disabilities, they are also twice as likely to have trouble accessing mainstream credit. This includes things like personal loans or credit cards.

Reasons People Don't Have Bank Accounts

People gave several reasons for not having bank accounts in the FDIC 2023 survey of underbanked and unbanked households. These include:

• Unable to meet minimum balance requirements

• Don’t trust banks

• Concerned about high or unpredictable bank account fees 

• Inconvenient bank locations

The survey also shows that about 30% of unbanked households had a history of falling behind on bill payments. Many of those households had turned to payday loans, pawn shops, or Buy Now Pay Later services. 

If you feel trapped by unmanageable debt, you’ve got options to free yourself. For example, a credit card debt relief program could be a way to negotiate and settle your balance for less than you owe. 

How Being Underbanked Can Impact Your Finances

Being underbanked or unbanked can be inconvenient and expensive. For one thing, it’s more difficult to build financial security. One reason is that small, everyday expenses add up. For example, regular financial transactions could carry extra fees, like having to pay a charge to receive a paycheck or pay a bill. 

Underbanked costs add up with slews of fees, penalties, and high finance charges. One estimate puts the cost of being underbanked at $40,000 over a financial lifetime. For some people, that could more than pay off their debts, buy a car, or even put down a down payment on a house. 

Then there are some indirect costs. Without savings accounts, people aren’t able to earn interest on their money. No investment account cuts you off from a relatively simple wealth-building option. It’s harder to build a credit history, which is used to calculate your credit score. Without a strong credit score, it’s usually more expensive to borrow money. 

Here are some of the extra costs you may have to pay if you're underbanked:

• Check-cashing fees. You may have to cash your paycheck at a check-cashing service. Some banks charge a flat fee of $4 to $10. Others charge 1% to 4% or more. Retail stores and check-cashing stores charge similar amounts.

• Money order service fees. You may need to use a money order to pay bills or transfer money to someone else. Fees are around $1 to $5 depending on the amount and location. For example, Walmart says it won't charge more than $1. The U.S. Postal Service charges $2.55 for money orders under $500.

• Payment apps and prepaid cards. Prepaid cards let you make electronic payments without a bank account. However, you might have to pay monthly account fees, transaction fees, top-up fees, and more. Many payment apps offer some fee-free transactions, but check for hidden fees.

• Excessive loan fees. Sometimes we need a small loan to get through a temporary rough spot. Without mainstream credit, you might turn to high-interest options like payday loans from predatory lenders. Payday loans are designed to keep you in debt indefinitely.

These extra costs leave the underbanked community with very little left over. This makes it harder to save for an emergency fund or a down payment on a home. Without a bank account, it's also more challenging to access student loans and get a college education. Ultimately, it's more difficult for underbanked people to get the traction they need to invest and plan for the future. 

What to Do if You Are Underbanked

People could be underbanked or unbanked for a number of reasons. Let’s take a look at how you can open a bank account—it may be easier than you think.

Perhaps you have trouble finding the right account for your needs, or you have some negative banking history, like unpaid fees. We’ll go through some of the different situations and how to address them. 

1. Analyze why you don’t open an account

There are a few ways to approach your need for a bank account. 

Get your ChexSystems report

Banks may deny your account application if you've had some past issues, such as bounced checks, unpaid fees, or closing an account with a negative balance. Banks use an agency called ChexSystems to track those kinds of issues. If you think you've been blacklisted, get a copy of your ChexSystems report to find out more.

If you find mistakes, report them and get the information corrected. You can do this online or contact ChexSystems by phone or letter. If your record shows legitimate fees, you might need to pay them. 

Get a second-chance account

Second-chance accounts are designed to help you access financial services, even if you’ve had trouble in the past. If a bank is unwilling to let you open an account, a second-chance checking account could give you another shot.

Second-chance accounts often charge monthly fees. They may come with restrictions, such as tighter limits on purchases and balances. Once you’ve proven yourself, after a year or so, you can ask to be transitioned into a regular account. Second-chance accounts operate a lot like secured credit cards.

Find a no- or low-fee account

Some banks, usually online banks, offer accounts with no minimum balance requirements. Look for free checking and savings accounts without monthly maintenance fees. Some also have buffers against overdraft fees, so you won't get dinged if your balance goes below zero.

Online banks have lower costs since they don't have to pay for brick-and-mortar bank branches. They also often deal in cash-free transactions. Check for accounts that are transparent about their fees so you don't get hit with unexpected charges.

If you don't have easy access to home internet, mobile banking apps let you manage your money on your phone. A mobile-focused account could let you do more than a traditional bank account with a banking app.

2. Find the right account for you

Whether you’re looking for a second-chance account or one with low fees, shop around to find an account that works for you. Look beyond the big banks. Some credit unions and local banks have products specifically designed for underbanked customers. Most credit union accounts are insured by the National Credit Union Administration (NCUA), which is similar to the FDIC.

Search for accounts with no minimum deposit requirements and no monthly fees. Make sure you can easily meet the requirements if the account has a waivable monthly fee. You may have to make regular deposits or maintain a set balance. Pay particular attention to policies around overdrafts and other fees. Some institutions are super transparent and actively advertise low-fee commitments.

Some second-chance accounts charge a monthly fee. Look for the best deal and check what services you'll be able to access. Make sure there's an in-network ATM near you.

3. Apply and open your bank account 

Once you've found the right account, the final step is to apply. You'll probably be able to open your account online, but if the bank has physical branches you can also do it in person. 

You'll likely need the following:

• Photo ID. For example, your passport, driving license, or state ID. 

• Social Security number or Individual Taxpayer Identification Number. This is to avoid money laundering and other types of fraud.

• Proof of address. This can be a utility bill, or a rental or mortgage agreement. Talk to the bank if you don't have a fixed address, as there may be ways around it.

You may have to make an initial deposit to complete the process. Check with the bank to find out if there are any specific requirements. 

4. Manage your debt without payday loans

If you find yourself in financial hardship, payday loans can cause additional long-term pain. Even without a bank account, you’ve got better options for borrowing. 

Payday loans are designed to be short-term, often just a week or two. These loans typically don't require a credit check, and they often charge interest rates around 400%, depending on the amount you borrow. Several states have banned payday loans altogether. 

The better choice would be a personal loan,which typically charges 10% to 36%. Even a cash advance from a credit card—which could be as high as 36% interest—would be preferable. If possible, avoid payday loans altogether and bridge the gap another way.

Why Certain Communities are Underbanked

When a neighborhood lacks physical branch locations, that can be a major cause of underbanking. Black households had to travel farther to get to a bank and couldn't get the same quality of products, according to a Yale University study.

Money issues today are still shaped by how people were treated in the past. For many years, families in minority neighborhoods couldn’t get fair housing and loan opportunities, which made it much harder to build wealth. Because of that history, some banks still assume these neighborhoods won’t be profitable, even when that isn’t true. 

In other words, it’s a cycle. Banks don't view people in minority neighborhoods as desirable customers so they don’t establish locations to serve them. As a result, those people have a hard time accessing services that could produce better customers.

How Banking Accessibility Varies by Location

Location has less of an impact on access to financial services than it once did. These days, you can do a lot of your money management from your phone or computer. No matter where you live, there's a competitive bank account that wants your business. 

Banking apps and mobile apps have made banking services far more accessible. As long as you have internet access, you can pay bills, transfer money, and use your accounts at any time of the day or night. You can also scan checks via mobile check deposit. 

Indeed, unless you need to regularly deposit physical cash, in-person banking may not even be necessary. Even that can often be done at an ATM. If there isn't a brick-and-mortar branch near you, look for banks with convenient in-network ATMs. 

That said, people who live in rural and mainly Black communities don't go to branches as often as those in mainly white ones. According to the Fed research, this is because they often have to travel farther. 

Why minorities are more likely to be underbanked

The FDIC research shows that about 25% of Black households are underbanked or unbanked. Black households were more than five times more likely to be unbanked than white households in 2023. 

Regardless of race, being poor means you’re less likely to have access to affordable financial services. Especially when you’re living in an economically depressed neighborhood.

There’s no simple solution. This issue requires good faith efforts by state and federal lawmakers, lenders, and other stakeholders. We can’t fix generations of financial discrimination overnight. However, open discussions about ways to overcome these barriers are a good place to start. 

Managing Debt With Help

If you have limited access to financial services, you might also be having trouble managing your debt. You’re not alone. There are steps you can take, including: 

• Credit counseling

• Debt consolidation loans

• Debt settlement

• Bankruptcy 

Debt relief can come in various forms. Freedom Debt Relief can help people get out from under predatory lenders or other overwhelming debt. The first step is to talk to an expert who can help you figure out your options. 

Don’t Let Underbanking Keep You From Reaching Your Goals

We don’t have all the solutions to the discrimination that affects so many, including those who are underbanked. However, there are ways to protect your financial interests and make the most out of an unfair set of circumstances.

Start by looking for no-fee checking or savings accounts. Learn more about the consumer protection laws that banks have to follow. If you've had issues with banks before, find a second-chance account. Over time, having a bank account will save you money in fees and contribute to your financial security.

People just like you are seeking debt relief in Knoxville, TN and across the country. The first step is the most important one—explore your options.