The Costs of Being Unbanked or Underbanked

According to a 2019 report by the Federal Reserve, 22% of American adults (63 million) are either unbanked or underbanked. The 6% of Americans who are unbanked have no bank account whatsoever and must rely on alternative financial products and services—such as payday loans, check cashing services, money orders, and pawnshop loans—to take care of their finances. The 16% of Americans who are underbanked have some sort of bank account, but they also rely on alternative financial services.

Who Are the Unbanked and Underbanked?

While there are unbanked and underbanked individuals at every income level, the majority of those without full access to banking are lower income. According to the Federal Reserve data, 14% of households making less than $40,000 are unbanked, compared to only 3% of households making more than that amount.

In addition, the unbanked and underbanked also are likely to have less education or to be in a racial or ethnic minority group, according to the Fed data. Put all of these characteristics together, and it's clear that those who are unbanked and underbanked are also those who may have historically felt shut out of traditional banking.

This lingering sense of being shut out is underscored by the main reasons given for remaining unbanked and underbanked. In the most recently published FDIC National Survey of Unbanked and Underbanked Households, households without full access to banks were asked why they did not have an account. The survey found that 52.7% of households stated that they did not have enough money to keep in an account, and 30.2% of households claimed they "don't trust banks."

Traditional Banking Failing to Enable Global Transactions

With the world moving to a more global footprint, traditional banks have failed to keep pace or outright eschew cross-border transactions, forcing even banked clients to seek alternative methods to make cross-border transfers.

Specifically, underbanked individuals in Morning Consult's August 2021 survey reported underbanked clients doing at least 1 of 3 activities with a provider other than a bank or credit union in the past year (purchased a money order, paid bills, or cashed a check.)

Alternative providers impose usury level fees and minimums for transactions – In the case of Western Union, a $600 minimum is required to send money to Mexico with a fee of over three percent (3%). More egregious, the victimization of transferors is seemly by design. For example, Western Union shows a Zero fee and only provides disclosure in a fine-print footnote of an "Exchange Fee" while never disclosing the actual dollar amount of the fee.

Key Demographics

According to the FDIC, the majority of unbanked and underbanked consumers are categorized as low income and minority with little education. The unbanked also often account for a high number of immigrants in the U.S.

Here are some FDIC statistics:
1 in 5 unbanked households earn less than $30,000 annually
1 in 5 African-American households are unbanked
1 in 3 African-American households are underbanked
1 in 6 Hispanic households are unbanked
3 in 10 Hispanic households are underbanked
1 in 6 households headed by a working-age disabled adult were unbanked
3 in 4 teens between ages 15-17 were unbanked
5 in 10 adults between ages 18-20 were unbanked

Women are disproportionally unbanked:

Alternative Financial Service Costs Are Higher Than They Look

While the costs of alternative financial services may seem preferable because they are disclosed upfront, they add up to a much steeper expense over time. According to the Financial Health Network, unbanked and underbanked Americans spent $189 billion in fees and interest on financial products in 2018, the latest year for which there is complete data. Using the FDIC's estimate that some 63 million Americans are unbanked or underbanked, that would be an average of $3,000 in annual costs per person.

As high as these costs are, they are only the direct costs that unbanked, and underbanked households face. There are a number of indirect costs that can have even greater consequences.

Time Costs

One of the biggest benefits of modern banking is access to financial technology. Whether you put your money in a traditional brick-and-mortar bank or an online-only bank, you will have access to a number of tech tools that make financial management easier, such as online bill pay, automatic transfers, direct deposit, and mobile check deposit, among others.

Those who are unbanked and underbanked often do not have free access to these tools. While prepaid cards can sometimes provide access to some of these options, there is generally an additional fee for each one. In order to access and use money at the lowest cost, the unbanked will need to take care of their transactions in person. This means taking time out of their day to visit an alternative financial service, which puts an added cost on their money.

Thus, unbanked and underbanked rates could be lowered if more consumers had access to low-cost financial products to better meet their needs.

Increased access to cost-efficient financial services would be beneficial for consumers. For example, Wal-Mart charges $3 to cash checks of $1,000 or less. And many check-cashing services charge up to 3 percent (3%) of the cashed check, which means the average person is paying over $24 to get an $800 check. Payday loans typically average $15 per $100 borrowed, preying on the unbanked and underbanked.