what does it mean to be underbanked?

What Does It Mean to Be Underbanked?

What does it mean to be underbanked? The financial landscape of the United States is diverse, with millions falling into the category of the “underbanked.” This refers to people or households with a bank account who often use non-traditional options like money orders, check-cashing, and payday loans. The underbanked face challenges due to limited access to affordable banking services or a preference for alternatives.

Key Highlights

  • Millions of Americans (13%) are underbanked, relying on alternative financial services like payday loans due to lack of access or preference.
  • Challenges like high fees, ID requirements, and mistrust of banks contribute to underbanking, especially among lower-income households and minorities.
  • Innovation in fintech, financial literacy programs, and policy changes offer hope for improved access and inclusion for the underbanked in the future.

Understanding the Underbanked

The underbanked are comprised primarily of lower-income households, as well as racial minorities and recent immigrants. The reasons for lack of access vary but often include:

These barriers mean many rely on alternative financial services like check-cashing outlets, money orders, payday loans, prepaid debit cards, and tax refund advances. However, risks such as exorbitant fees, predatory lending practices, and excessively high interest rates often accompany these options. For example, a loan without bank account from a payday lender can come at a 391% annual interest rate.

The underbanked population is unique and diverse, and solutions addressing financial inclusion require nuance. Organizations across both the public and private sectors have ramped up innovative tools and resources to meet this community’s needs.

Statistics on the Underbanked in the U.S.

A 2021 Federal Reserve study on the financial health of American households revealed that in 2020, 13% of adults had inadequate access to banking services, while 5% had no access at all. This represents an improvement from 2018 when 16% were underbanked. The Federal Deposit Insurance Corporation (FDIC) revealed that 5.4% of U.S. households were unbanked in 2019, signaling that the vast majority had at least a checking or savings account.

The demographics of the underbanked, as presented by the Board of Governors of the Federal Reserve System, shed light on the correlation between family income, education, and race/ethnicity:

CharacteristicUnbankedUnderbankedFully banked
Family Income
Less than $25,00016%21%63%
$100,000 or more1%5%94%
Less than a high school degree26%24%51%
High school degree or GED8%

Some college/technical or associate degree4%16%79%
Bachelor's degree or more1%8%92%

When it comes to credit applications, income disparities become evident. Individuals with incomes under $50,000 per year were significantly more likely to face denials compared to those with incomes over $100,000. Racial disparities persist, with Black and Latinx individuals experiencing higher rates of adverse credit outcomes than their White counterparts.

CharacteristicDeniedDenied or Approved for Less than Requested
Less Than $50,000
$100,000 or more
All Income Levels

The FDIC’s study aligns with the Federal Reserve’s conclusions, highlighting the links between the underbanked and lower-income, lower education levels, and reduced access to credit. It also delves into bill payment methods, revealing that 11.9% of households use money orders, 5.5% use cashier’s checks, and 4.9% use bill payment services like those offered by Western Union and MoneyGram.

The Underbanked Customer: Navigating Challenges

An underbanked individual refers to a person who, despite having a bank account, frequently relies on alternative financial solutions like money orders, check-cashing services, and payday loans for financial management.

The distinction between the “unbanked” and “underbanked” lies in whether a household has a checking or savings account. Underbanked households use alternative financial services regularly, while unbanked households abstain from traditional banking altogether.

Factors Contributing to Underbanking

Several factors contribute to the prevalence of underbanking. Traditional financial services may not be universally accessible due to deposit minimums, fees, or stringent loan criteria. Additionally, banks might not aggressively advertise their services, leaving potential customers unaware of available options.

Navigating the Underbanked Landscape: A Beacon of Hope

Being “unbanked” or “underbanked” negatively impacts households, leading to a reliance on high-cost and often predatory alternatives. The FDIC reports that 7.1 million U.S. households were unbanked in 2019. Recognizing this challenge, numerous resources are emerging to help the underbanked navigate the financial system, offering solutions to the challenges they face.

What is the Difference Between Unbanked and Underbanked?

DefinitionIndividuals or households without a bank account.Individuals or households with a bank account but often use alternative financial services.
Engagement with BanksCompletely avoid traditional banking services.Have a bank account but frequently use alternative financial services.
Financial Services UsageDo not utilize traditional banking services like checking or savings accounts.Use alternative financial services, such as money orders, check-cashing, payday loans, alongside a bank account.
Reasons for StatusLack of access, mistrust of banks, or personal choice.Limited access to affordable banking, preference for alternatives, or facing barriers with traditional banking.
Common PracticesRely on cash transactions and alternative services.Supplement traditional banking with alternative services like payday loans or check-cashing.
Financial InclusionExcluded from mainstream financial services.Included in traditional banking but seek alternatives.
Key ChallengeLack of access to basic banking services.Reliance on potentially high-cost alternative services despite having a bank account.

Understanding the Unique Underbanked Population

The underbanked demographic comprises primarily lower-income households, racial minorities, and recent immigrants. Barriers to access include inadequate funds, mistrust of banks, strict identification requirements, high account fees, and histories of involuntary bank account closures.

These challenges drive many to alternative financial services such as check-cashing outlets, money orders, payday loans, prepaid debit cards, and tax refund advances. However, the allure of these alternatives is tempered by risks such as exorbitant fees, predatory lending practices, and exceptionally high-interest rates, reaching up to 391% annually.

Recognizing the diversity of the underbanked population, organizations in both the public and private sectors are deploying innovative tools to address financial inclusion with nuance.

Emergence of New Financial Solutions

In response to the unique challenges faced by the underbanked, innovative services have entered the market, enhancing access and aiding users in navigating the financial system.

Lightning-Speed Fintech

Fintech firms leverage digital technology and automation to provide faster and more accessible financial services. These include:

  • Cryptocurrency and blockchain networks enabling global peer-to-peer transactions beyond the reach of a single authority.
  • Automated robo-advisors offering investment portfolio management advice.
  • Streamlined digital-only banking for a more user-friendly experience.

Payments Processing Advances

Prepaid debit cards, such as those provided by Netspend, allow users to load funds for future use without linking to a bank account. These cards now offer features like direct deposit, savings accounts, discounted check cashing, and bill pay options. Mobile payment services like Zelle, Venmo, and Apple Pay are gaining popularity for quick peer-to-peer transactions, with Zelle allowing users to send money using an email address or mobile number.

Financial Apps

Apps like Dave, Earnin, and Brigit are designed to help users budget, access short-term advances on upcoming paychecks (with no fees or interest), and build rainy day funds. Features like overdraft warnings, cash flow visualization tools, and automated savings are showing promise.

Affordable Bank Accounts

Second-chance bank accounts specifically cater to customers rebuilding from past financial challenges, such as overdrafts or involuntary account closures due to negative balances. Organizations like BankOn connect consumers to certified accounts with low costs, no overdraft fees, and other consumer safeguards.

Credit Builder Products

Secured credit cards allow cardholders with poor or no credit history to make payments toward a cash deposit securing the line of credit. This helps establish a positive payment history relayed to credit bureaus. Some providers, like Self, additionally report monthly payments for on-time bills and monthly streaming services.

Temporary Challenges and the Road Ahead

While considerable progress is being made, challenges limiting access and affordability persist, requiring ongoing innovation:

The Digital Divide

Limited internet access in low-income and rural communities hinders the reach of online and mobile banking innovations.

The Wealth Gap

America’s racial wealth gap persists, with white households holding over 8 times the wealth of Black households. Discriminatory policies continue to create barriers to asset building.

Mental Taxation

Navigating complex financial systems not designed with the underbanked in mind takes a psychological toll. More consumer-friendly innovations are needed to reduce this “mental taxation” burden.

What's Ahead: A Glimpse into the Future

Financial Innovation Policies

Government entities play a crucial role in balancing consumer protections with enabling beneficial innovation. Recently proposed bills, such as the Consumer Financial Protection Bureau’s Federal Fintech Charter, signal steps toward “regulation innovation” to spur competition and expand consumers’ options.

Financial Literacy Improvements

Initiatives aimed at improving financial literacy education show promise in empowering smarter, more self-assured financial consumers from an early age. Free online resources, including games and courses from organizations like Khan Academy, CFED, and Operation Hope, can help demystify personal finance resists, with white households holding over 8 times the wealth of Black households. Discriminatory policies continue to create barriers to asset building.

Banking Accessibility Evolution

Mainstream banks are feeling the pressure from young fintech disruptors. For example, Visible offers early access to paychecks, automatic savings, overdraft protection, and in-app budgeting – all without minimum balance requirements or overdraft fees. These features represent the type of banking model likely to prevail long-term by genuinely serving vulnerable groups.

Cryptocurrency Disruption

While still in the early stages, crypto innovations like decentralized finance (DeFi) aim to provide automated global financial services spanning payments, investing, borrowing, lending, and more. By expanding access, better serving the underbanked appears to be part of crypto’s DNA.

In addition to these advancements, areas requiring further innovation include alternative credit scoring, public banking legislation, and improved cryptocurrency accessibility:

Alternative Credit Scoring

Traditional credit scores from bureaus like Equifax, Experian, and TransUnion often exclude or disadvantage the underbanked. New scoring models using alternative data sources, as pioneered by companies like Nova Credit and Boost Credit, could help build financial identities for credit invisibles.

Public Banking Options

Policies supporting the development of public banking options show potential. Public banks focus on expanding financial access and inclusion. If enacted judiciously, reforms could enable locally attractive public banks to gain momentum in serving the underbanked.

Cryptocurrency Accessibility

Cryptocurrencies and decentralized finance protocols must continue improving usability and enhancing financial literacy around digital assets to drive adoption. Crypto projects prioritizing simplified user experiences have the best shot at scaling inclusively over time.

As the financial landscape evolves, these innovations and policy measures hold the potential to significantly advance financial inclusion for the underbanked, providing a brighter and more accessible future for all.


In conclusion, addressing the challenges faced by the underbanked is essential for achieving financial inclusion. While progress has been made through innovative fintech solutions, improved financial literacy, and evolving policies, persistent issues such as the digital divide and the wealth gap remain. Ongoing collaboration across public and private sectors, coupled with continuous innovation, is crucial to building a more equitable and accessible financial landscape. As the financial world evolves, prioritizing the needs of the underbanked ensures a future where everyone has equal access to secure, affordable, and empowering financial services.


  • Unbanked: Individuals or families without any bank account.
  • Underbanked: Individuals or families with a bank account who frequently rely on alternative financial services like check-cashing or payday loans.
  • Lack of access to affordable banking services.
  • High fees and minimum balance requirements.
  • Mistrust of banks or past negative experiences.
  • Lack of identification required for opening an account.
  • High fees and interest rates, particularly for payday loans.
  • Predatory lending practices and hidden costs.
  • Lack of consumer protection and security compared to traditional banks.
  • Expansion of affordable banking options with low fees and no minimum balances.
  • Development of secure and user-friendly online and mobile banking platforms.
  • Financial literacy education programs to empower individuals to make informed financial decisions.
  • Public policy initiatives supporting financial inclusion and consumer protection.
  • Fintech innovations like cryptocurrency and decentralized finance have the potential to offer greater access and affordability.
  • Public banking options could emerge to serve specific communities and expand inclusion.
  • A shift towards more consumer-centric banking models focusing on user needs and financial well-being will be crucial.
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