What Does It Mean to Be Underbanked?

The term “underbanked” refers to individuals who possess traditional bank accounts, such as checking or savings accounts, but still frequently rely on alternative financial services outside of mainstream banking. These alternative services include products like payday loans, check-cashing services, and prepaid debit cards. The underbanked often utilize these services to manage their finances and make purchases, indicating that their access to traditional banking may be insufficient for their complete financial needs. This reliance on non-traditional options highlights a segment of the population that, despite having some connection to the banking system, operates on the fringes of it.

Defining the Underbanked Population

This group is distinct from the “unbanked,” who have no bank accounts at all and operate entirely outside the traditional banking system. While the unbanked typically transact in cash and store assets in physical formats, the underbanked have a foot in both worlds. Approximately 14.2% of U.S. households were underbanked in 2023, representing about 19.0 million households, while 4.2% were unbanked.

Characteristics of the Underbanked

Individuals categorized as underbanked often share common demographic and socioeconomic characteristics. They are disproportionately represented among low-to-moderate income households, with a significant percentage earning less than $25,000 annually. Education levels also play a role, as nearly one in four households without a high school diploma were underbanked in 2023, compared to about 10.4% of those with a college degree.

Racial and ethnic minorities are also significantly more likely to be underbanked. For instance, Black and Hispanic households are more than twice as likely to be underbanked compared to white households. Approximately one in five Black, Hispanic, American Indian or Alaska Native, and Native Hawaiian or other Pacific Islander households were underbanked, contrasting with one in ten white households. These groups often face limited access to mainstream credit, making it more challenging to obtain traditional loans or credit cards.

Their financial behaviors frequently involve managing money outside the digital economy, often relying heavily on cash transactions. Many also lack a strong credit history, meaning they may have no usable credit score or be considered “credit invisible.”

Reasons for Being Underbanked

Several factors contribute to individuals becoming or remaining underbanked. High bank fees and minimum balance requirements are frequently cited reasons, with many consumers believing they do not have enough money to maintain a traditional bank account without incurring charges. The complexity of bank fee structures can also make costs seem unpredictable, deterring some individuals from fully engaging with traditional banks.

A lack of trust in traditional financial institutions is another significant barrier. Some individuals have experienced negative interactions with banks or perceive them as untrustworthy due to past incidents or concerns about privacy. This distrust can lead to a preference for alternative services, even if they come with higher costs.

Geographic access also presents challenges, particularly in rural or low-income areas that may lack sufficient bank branches, sometimes referred to as “banking deserts.” This limited physical access, coupled with potential issues like unreliable internet connectivity, can make digital banking options less viable for some populations. Additionally, individuals with irregular income streams, such as gig economy workers, may find traditional banking services less accommodating to their fluctuating financial patterns, driving them to seek more flexible, albeit costlier, alternatives.

Financial Services Used by the Underbanked

Underbanked individuals often rely on a range of alternative financial services and products to manage their money. Check-cashing services are a common choice, providing immediate access to cash from paychecks or other checks, typically for a fee ranging from 1% to 4% of the check amount, plus a flat fee of a few dollars. These services are used when individuals need funds quickly, as traditional banks may place holds on deposited checks for several days.

Money orders are another frequently used service for paying bills or sending money, especially for those who prefer not to use bank accounts or credit cards. Prepaid debit cards are also popular, allowing users to receive direct deposits, make purchases, and withdraw cash from ATMs without a traditional bank account, though they may incur various fees for transactions or monthly maintenance.

For short-term borrowing needs, underbanked individuals may turn to payday loans or title loans. Payday loans are small, short-term loans, often for $500 or less, typically due on the borrower’s next payday. These loans carry substantial fees, commonly $10 to $30 for every $100 borrowed, translating to an annual percentage rate (APR) of around 400%.

Title loans, which use a vehicle’s title as collateral, also come with high interest rates, averaging around 300% APR annually, along with potential documentation and processing fees. Pawn shop loans offer another avenue for quick cash, using personal property as collateral. These alternative financial services provide immediate solutions but often come with significantly higher costs compared to mainstream banking products.