Most U.S. Adults and the Banking System: A Deep Dive into Unbanked and Underbanked Populations
While most adults in the United States depend on traditional banks and credit unions for their financial needs, a 2022 report by the Federal Reserve highlighted a significant gap: in 2021, 19% of American adults were either unbanked or underbanked.
Let’s explore this and discuss strategies to transition from unbanked to fully banked.
Key Takeaways
- Unbanked individuals do not utilize traditional financial services like bank accounts and credit cards, relying instead on alternative financial services that often come with high costs.
- Underbanked individuals have a bank account but continue to use cash and alternative financial services for transactions.
- Second-chance bank accounts offer opportunities for those with challenging credit histories to open checking accounts.
- As the gig economy expands, the financial industry must adapt to meet evolving banking needs.
Unbanked vs. Underbanked
According to the Federal Reserve’s report, 6% of U.S. adults were unbanked in 2022, mirroring the figure from 2021. The term “unbanked” refers to people who do not use—or lack access to—traditional financial services such as savings accounts, credit cards, personal checks, and loans.
In contrast, 13% of U.S. adults were underbanked in 2021. Underbanked people have some form of bank account but also use alternative financial services to manage their finances and make purchases.
Who Are the Unbanked and Underbanked?
The Federal Reserve’s findings suggest that unbanked and underbanked individuals are more likely to:
- Have lower incomes
- Unbanked: 17% of people earning below $25,000 were unbanked, compared to 2% of those earning over $50,000.
- Underbanked: 20% of those earning below $25,000 were underbanked, versus 5% of individuals with incomes over $100,000.
- Possess less education
- Unbanked: 34% of individuals with a high school diploma or less were unbanked. In comparison, only 1% with a bachelor’s degree or higher were unbanked.
- Underbanked: 38% of those with a high school degree or less were underbanked, compared to 7% with a bachelor’s degree or more.
- Belong to racial or ethnic minority groups
- Unbanked: 13% of Black adults and 9% of Hispanic adults were unbanked, compared to 3% of White adults and 2% of Asian adults.
- Underbanked: 27% of Black adults and 18% of Hispanic adults were underbanked, versus 10% of White adults and 6% of Asian adults.
Banking Deserts
Banking deserts are a significant factor in areas lacking convenient and affordable banking options. These are most common in rural communities, where large financial institutions hesitate to establish branches due to smaller populations and limited profit potential.
Consequences of Banking Deserts
Residents in banking deserts face several challenges:
- Higher Costs: Relying on alternative financial services with high fees and interest rates.
- Limited Credit Building: Missing opportunities to establish and build credit histories.
- Reduced Financial Literacy: Less exposure to financial education and resources.
- Barriers to Wealth Accumulation: These factors collectively hinder building wealth over time.
How to Become Banked
If you’re unbanked or underbanked due to past financial mistakes or limited credit history, there are steps you can take to become banked.
Individual Development Accounts (IDAs)
These are matched savings accounts that help low-income individuals save towards purchasing a home, education, or starting a business.
Second-Chance Banking
Second-chance bank accounts offer a solution for those with past banking issues. These accounts allow individuals to rebuild their banking history and eventually qualify for a standard account.
Prepaid Debit Cards
For those unable to obtain traditional bank accounts, prepaid debit cards offer an alternative for making cashless purchases.
Secured Credit Cards
Secured credit cards are an effective tool for building or repairing credit by requiring a refundable security deposit, which serves as your credit limit.
Online Banking
If local banking options are limited, online banks offer a convenient alternative with lower fees and high-yield savings accounts.
Credit Unions
Credit unions are member-owned financial institutions that often provide lower fees, better rates, and community-focused services.
Gig Economy Banking
As the gig economy grows, freelancers and side hustlers need flexible banking solutions that cater to irregular income streams.
Frequently Asked Questions (FAQs)
How Do People Become Unbanked?
People become unbanked for various reasons, such as lack of access to financial institutions, distrust in banks, or poor banking history.
Are There Alternatives to Payday Lenders?
Yes, alternatives include assistance programs, credit unions, and community banks that may offer small-dollar loans with better terms.
Is a Bank Account Better Than a Prepaid Debit Card?
Generally, yes. Bank accounts offer more services, lower fees, and the ability to build credit, while prepaid cards often come with various fees and do not help in building credit history.
The Bottom Line: By taking proactive steps and leveraging available resources, transitioning from unbanked or underbanked to fully banked is an achievable goal, paving the way toward financial stability and growth.
Discussion about this post