As we wrap up 2016, there are still almost 20% of American households that are considered to be “underbanked”. This means that they often combine basic products (such as a savings account) with alternative forms of financing. While 20% still seems like a high number to us, this is actually a very slight improvement per the latest Federal Deposit Insurance Corporation (FDIC) data.
There are many reasons why people either do not have a checking and/or savings account or why they use other forms of financing when they need to borrow money. We have even be sent emails supporting these reasons. The primary reasons fall into the following categories, but some people have more than one reason for making a decision to be “underbanked”. The main reasons per the FDIC are as follows.
- Lack of savings so that opening an account does not make sense to them.
- Some households have privacy concerns, as they do not want a bank to have their personal information.
- People often rely on high priced lenders, such as payday loans or peer to peer products.
- Seniors and the disabled may not have a way to get to a bank due to lack of transportation, and they do not want to or know how to bank online.
- Some people are still fearful due to the 2007-08 banking crisis.
- Youth are sometimes turning to online lenders that are not technically banks for short term loans.
- Immigrants and/or non-English-speakers may not be aware of the system in the US.
- Prepaid cards are being used by over 15% of households, so almost ¾ of people that are underbanked are using these cards for money.
What are underbanked households doing for money?
The 20% of Americans that are underbanked equates to about 24 million households. This means that over 20 million families are turning to any one of a number of low cost lenders. So while this number is slightly lower than in past years, the big improvement per the FDIC is the percentage of “unbanked” households. This number now stands at about 7.7%, which is down almost ten percent from 2013.
The key difference between “unbanked” and “underbanked” is unbanked means that the individual is completely outside of the mainstream services available to them. So they do not have a checking or savings account, they do not have a credit card or home loan, and they completely stay away from all those products.
On the other hand, “underbanked” means that the individual has one product they use, such as maybe an ATM card. Or maybe they have borrowed money in some other fashion, such as using a pawn shop loan. But they only use one basic service and tend to do what they can to limit their exposure to a local or national bank.
So a key question we need to answer is where are these people turning to for help. If they have an emergency, unexpected bill or need to repair their credit, or if they want to borrow some money, where do the underbanked go for this? That is a key question, and unfortunately the answer is often they use some form of high risk lender.
According to the 2016 FDIC report, about 15% of Americans use prepaid cards. Another 13 million families, or 10% of Americans, use payday loans (which we counsel against turning too). There are also several million households that are turning to paw shops or even loan sharks. Each and every one of these options are generally considered to be high risk, as the money being borrowed comes with a very high interest rate.
While there have been some improvements in the number of people turning to mainstream banking products, there are still too many families that are not in the system. We always strongly encourage them to open a bank account to at least start the process. Even if someone only has a few dollars, many lenders will offer some type of low cost (or even free) account that can be opened. This will help the underbanked by allowing them to build credit, get access to more affordable loans, and many banks also offer their customers with access to basic financial advice around savings and more.