Underbanked

Underbanked refers to families that prefer to manage their finances through cash transactions instead of more traditional financial services such as checking accounts, savings accounts, credit cards and loans.

Although some households are considered unbanked because they do not use banks or financial services at all, the underbanked segment of the population may have checking or savings accounts, but often access less traditional financial products and services, such as short-term payday loans and check cashing services.

Underbanked households represent approximately 20 percent of all households in the U.S. according to a 2015 study by the FDIC.

In that study, underbanked households are defined as those that may have a checking or savings account, but often rely on alternatives to traditional loans and credit cards to fund purchases and manage their finances. Unbanked households, about 7 percent of all households, do not have bank accounts at all.

The 2015 FDIC study offers some insights into the reasons why underbanked families do not take advantage of traditional banking services.

Grouped by income, underbanked households generally had lower incomes. Approximately  24 percent of households with an annual income of less than $15,000 were underbanked with 45 percent fully banked. Higher income households, $75,000 or more per year, differed in their use of traditional banking services in that only 13.5 percent were underbanked. Underbanked families were also found to have less education, with only 14.5 percent reporting at least one family member with a college degree compared to 79 percent of families considered fully banked.

Approximately 15 percent of underbanked households reported using prepaid cards as a way to pay for goods and services compared to only 7 percent for those fully banked. Credit card use was also reported to be lower with 58 percent of underbanked households using at least one credit card compared to nearly 75 percent of fully banked households.

In addition, underbanked households reported less access to traditional bank credit. Although roughly the same percentage of these households applied for credit from a bank, 5.8 percent of underbanked households were denied bank credit compared to 2 percent of those fully banked. In fact, more than 13 percent of underbanked households report being discouraged from even applying for bank credit at all, compared to only 3.5 percent of fully banked households.

Routine payment of bills also reveals a pattern for the underbanked population. More than 12 percent of underbanked families used bank money orders or cashier’s checks compared to 3.1 percent of those fully banked. In addition, more than 25 percent of underbanked households also used non-bank money orders. Cash was reported as the primary method for paying monthly bills by 11 percent of underbanked families compared to only 3 percent of fully banked families.

The FDIC report noted that households with less predictable and more volatile incomes were likely to be underbanked. The report also suggested that underbanked families do use mobile phones almost as much as other families and may benefit from more traditional banking services available via mobile devices.