Unbanked: What It Means & The Cold Reality

Written by Bradon MatthewsUpdated: 28th Oct 2021
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It’s pretty much assumed that every adult has a bank account anymore. It’s moved from a convenience to a supposed necessity for modern living.

But it may surprise you to discover that a significant number of US adults are still unbanked.

You may be wondering how this is possible. This article will dig into just that, exploring what it means to be unbanked and how it can impact your finances.

What Does It Mean to Be Unbanked?

Being unbanked simply means you don’t have a bank accountof any sort. Unlike most people who rely on debit cards linked to accounts to pay for things, unbanked people use a combination of cash, money orders, and prepaid cards.

While this may allow them to participate in things like online shopping, there are still several downsides to being unbanked. We’ll discuss these later.

>> More: Compare the Best Online Bank Accounts

Who Are the Unbanked?

While anyone can be unbanked, the majority tend to be minorities in the Black and Latinx communities. In these demographics, the higher prevalence of being unbanked results from a lack of accessibility.

Many people in these communities simply don’t have the information available to understand how banking works.

They may also lack access to affordable banks. High banking fees and high minimum balance requirements can bar lower-income individuals from opening online bank accounts. Poverty disproportionately affects people of color in the US.

Additionally, many unbanked people don’t trust institutions or the government with their money. This extends beyond minority communities. Particularly in southern states, people of all backgrounds choose not to join a bank because of mistrust.

Much of this mistrust can be traced to a lack of education. The poorly educated are highly represented in unbanked demographics.

Why Is Being Unbanked a Problem?

Being unbanked means an individual is uninsured by the FDIC. This is a highly precarious place to be, as any money lost is gone for good.

Unbanked people also miss out on things like retirement accounts, compounding interest, and all the other beneficial aspects of online banking they can leverage to increase their financial health. In the long term, being unbanked can cost a huge amount of money.

Unbanked vs. Underbanked

Similar to the unbanked, the underbanked utilize non-traditional means of money management and advances. The difference is that the underbanked have bank accounts. These bank accounts go largely unused, though.

Instead of using banks or other financial institutions for financial services, the underbanked prefer cash transactions.

They also tend to use things like payday loans or pawnshop loans rather than turning to banks for proper loans.

In these ways, they have much in common with the unbanked.

>> More: How to Switch Bank Accounts

Why Are People Unbanked?

People tend to be unbanked either because they lack banking information or because they don’t have the finances to pay bank fees.

Those with little education often don’t understand banking procedures. This can make them reluctant to open an account and may even cause them to doubt the trustworthiness of banks altogether.

To begin with, those who don’t have much money often can’t open accounts because they can’t meet the minimum balances required to do so. Additionally, account maintenance fees may be a financial barrier to those struggling financially.

What Are the Risks of Being Unbanked?

The biggest risk to the unbanked is the lack of insurance involved. Unbanked money isn’t FDIC insured, meaning that the unbanked face an enormous risk those with bank accounts don’t.

In addition, unbanked people must rely on a host of alternative financial services. These services have a high probability of being untrustworthy.

Those who regularly use alternative means of money transfer or cash advances may face predatory practices or outright fraud.

How to Start Banking if You are Unbanked

#1. Avoid Overdraft Fees

When you open an account, you should focus on keeping your account in the green. Overdraft fees are some of the harshest and avoiding these will save you money in the long run.

The best way to avoid overdraft fees is to budget appropriately. Keep track of the amount you spend and set a limit to ensure you don’t go over your account balance.

Mobile banking apps or budgeting apps can both help you monitor your finances. Use these apps to help you budget, and you’ll be free of overdraft fees.

#2. Second Chance Bank Account

If you’re unbanked because your credit is too poor to open a bank account, look into a second chance account.

Second chance accounts are minimalistic checking accounts with lower spending limits designed to help you get your foot back in the banking door.

Second chance accounts also help those who have a questionable Chexsystem history. Less commonly considered than your credit score, your Chexsystem history keeps track of all your checking and savings account activity.

Banks use this information to determine your eligibility for accounts. Those who have had lots of overdrafts or similar issues in the past can have a hard time opening new accounts for this reason.

Second chance accounts are more forgiving and give account holders a chance to atone for their past banking sins.

>> More: See the Best Online Bank Accounts

#3. Community Development Financial Institution

Community development financial institutions are institutions that exist solely to help the underserved and underprivileged participate in mainstream financial practices. They do so by offering low-interest loans and investing in underdeveloped communities.

These institutions are a great way for unbanked people to avoid sketchy loans. Rather than go through an unreliable and potentially predatory loan provider, unbanked people can use the much lower risk loans on offer from community development financial institutions to fund their small business or just get the money they need to get by.

Bottom Line: What Does It Mean to Be Unbanked?

Unbanked people avoid opening accounts with banks because they are unable to or because they don’t properly understand or trust banks in general. These people tend to be marginalized and underserved.

People without bank accounts miss out on the many beneficial elements of banking, such as interest accrual and FDIC insurance.

Additionally, unbanked people often have to resort to risky alternatives when they need loans. This can result in serious damage to their financial well-being in the long run.

If you are unbanked, consider opening a second chance bank account or leveraging community development financial institutions to reduce your financial risk.

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Bradon Matthews
Bradon Matthews

Bradon Mathews is a personal finance writer & product analyst with a breadth of experience. He enjoys analyzing market information and trends to help you make sense of the complex and ever-changing world of finance. His passion is providing practical advice so you can feel more confident managing your money. Bradon attended Colorado State University where he studied Philosophy.