Underbanked Communities: Falling Between the Cracks

Unbanked versus Underbanked

Underbanked is a general label describing two consumer segments: individuals with no bank accounts (unbanked) and individuals with bank accounts who regularly use non-traditional financial institutions (underbanked).

In 2017, 8.4 million U.S. households were “unbanked,” meaning that no one in the household had a checking or savings account. An additional 24.2 million U.S. households were “underbanked,” meaning that the family unit had an account at an insured institution but also obtained financial products or services outside of the banking system. Globally, 1.7 billion adults outside the U.S. do not currently have access to traditional financial services.

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The cost to the economy is high for those who may not have the opportunity to conduct basic financial transactions, save for emergency and long-term security needs, build a credit history, and access credit on fair and affordable terms. Additional costs of between $1.8 billion and $4.5 billion a year are paid by America’s unbanked and underbanked citizens for products such as money orders, check cashing, international remittances, payday loans, pawnshop loans, and auto title loans.

Is Fintech the Answer?

With 96 percent of Americans and 66 percent of the global population having access to a mobile device, fintech may offer viable solutions to the underbanked population.

Banks that offer outreach to the underbanked may not only help meet community needs but also receive consideration under the Community Reinvestment Act (CRA) and the Equal Credit Opportunity Act.

Enacted in 1977, the CRA seeks to encourage financial institutions and other financial services to meet the needs of low-income communities, many of which overlap with underbanked populations. One of the main goals was to reverse the effects of redlining, a practice of segregating neighborhoods through investment strategy. In practice, this translated to the systematic denial of financial services, like mortgages and loans, to people of color.

Many banks have successfully offered both high-tech and low-tech programs (such as financial education) to serve the underbanked in their communities. Addressing the root of the underbanked issue, however, revolves around transforming discriminatory practices. Financial institutions and communities alike must come together to support equal financial access.

On the technical side, FIs can carefully consider the products they offer, utilize data analytics, and embrace technology such as AI to help improve the financial lives of the underbanked population. These innovations might also give financial institutions an increase in their deposits and customer base, strengthening the local community.