Underbanked describes people or households that have at least one bank account but regularly rely on alternative financial services—check‑cashing outlets, money orders, prepaid cards, payday loans, and similar products—instead of using mainstream banking and credit products (checking/savings, conventional loans, credit cards) to meet everyday needs.
Key takeaways
– Underbanked = has a bank account but frequently uses alternative, often higher‑cost, financial services.
– In 2020 the Federal Reserve estimated 13% of U.S. adults were underbanked; 5% were fully unbanked (no account). (FRB, 2021)
– Definitions and estimates differ across surveys: FDIC and the FRB measure “underbanked” differently, so their percentages are not directly comparable. (FDIC; FRB)
Understanding the underbanked
Why it matters:
– Reliance on alternative services often increases household costs (fees, high interest) and reduces access to safe, lower‑cost credit and savings tools.
– Underbanked households can have more difficulty building credit histories, saving reliably, and weathering income shocks.
How many people are underbanked in the U.S.?
– Federal Reserve (Report on the Economic Well‑Being of U.S. Households, 2020): 13% of U.S. adults were underbanked in 2020; 5% unbanked. (FRB, May 2021)
– The FDIC’s 2019 survey found 5.4% of U.S. households were unbanked in 2019 (94.6% had a checking or savings account). FDIC has reported different underbanked estimates across years (e.g., 2017: ~48.9 million adults, 18.7%). Because the FRB and FDIC use different definitions and methods, their underbanked figures aren’t directly comparable. (FDIC How America Banks 2019; FDIC 2017 survey)
Who are the underbanked?
Common characteristics (FRB and FDIC findings):
– Higher representation among lower‑income households: among the underbanked in the FRB study, 21% had family income under $25,000 versus only 5% with income over $100,000.
– Lower educational attainment: 24% lacked a high‑school degree versus 8% with a bachelor’s or more.
– Racial/ethnic disparities: 27% of Black and 21% of Latino/Latina adults were underbanked, compared with 9% of White adults.
– Households with volatile or unpredictable incomes are more likely to be underbanked.
– People with annual incomes under $50,000 were more often denied bank credit (39% denials) than people with incomes over $100,000 (9% denials); in every income bracket, Black and Latino/Latina applicants faced worse credit outcomes than White applicants. (FRB, 2021)
What is an underbanked customer?
An underbanked customer has a bank account but commonly uses alternative financial products (payday loans, check‑cashing, money orders, prepaid cards, bill‑pay services like Western Union) to meet routine financial needs.
What’s the difference between unbanked and underbanked?
– Unbanked: no checking or savings account.
– Underbanked: has an account but regularly uses nonbank alternatives.
Why are so many people underbanked?
Key factors
– Cost and account requirements: minimum balances, monthly fees, and overdraft charges can be barriers.
– Credit access: stringent underwriting and credit checks may exclude people who need small or short‑term loans; payday lenders and check‑cashers are easier to use.
– Lack of product fit: bank hours/locations, documentation requirements, or digital access barriers can make bank services impractical.
– Awareness and trust: limited outreach, perceived complexity, or mistrust of banks can push people toward familiar nonbank providers.
– Volatile income: irregular pay schedules make fee‑sensitive households turn to cash and short‑term credit. (FRB; FDIC)
Fast fact
From FDIC data (2019): 11.9% of households used money orders, 5.5% used cashier’s checks, and 4.9% used bill‑payment services to pay bills—behaviors typical of underbanked households.
Practical steps — for individuals who are underbanked
1. Inventory your fees and usage
• Track how much you spend monthly on check‑cashing fees, payday loans, money orders, ATM surcharges, and prepaid card fees. This shows where savings are possible.
2. Compare low‑cost bank options
• Look for no‑monthly‑fee or low‑minimum checking and savings accounts, credit union accounts, and online banks with free ATM networks. Ask about fee waivers for direct deposit or low balances.
3. Consider credit unions and CDFIs
• Community banks, credit unions, and community development financial institutions (CDFIs) often offer lower‑cost small loans, flexible underwriting, and financial counseling.
4. Build credit affordably
• Use secured credit cards or credit‑builder loans to establish a history. Make on‑time payments and keep balances low.
5. Avoid high‑cost short‑term loans
• Replace payday loans with alternatives: small emergency loans from a credit union, short‑term small‑dollar loans from banks/CDFIs, or community assistance programs.
6. Use digital tools carefully
• Mobile deposit, automated savings, and budgeting apps can reduce the need for check‑cashers and money orders. But watch for app fees and privacy terms.
7. Establish stable banking behaviors
• Set up direct deposit, automate bill payments, and keep a small buffer to avoid overdraft fees. Talk to your bank about overdraft protection or fee waivers.
8. Seek free financial counseling
• Nonprofits and credit counseling agencies offer free or low‑cost help with budgeting, debt management, and product selection.
Practical steps — for banks, fintechs, and policymakers
For banks and fintech firms
– Design affordable, no‑or‑low fee accounts (no minimums, transparent fees).
– Offer small‑dollar loan products and credit‑building tools.
– Improve outreach and remove unnecessary ID/documentation hurdles.
– Partner with CDFIs and community organizations for trust and reach.
For policymakers and regulators
– Support and expand CDFI funding and programs.
– Encourage disclosure rules that make fees easy to compare.
– Promote financial inclusion programs that reduce barriers to safe banking and affordable small‑loan products.
– Regulate predatory short‑term lending to reduce harm.
Important
Different surveys use different definitions of “underbanked.” The FRB and FDIC estimates reflect differing methodologies; always check the survey source and year when comparing statistics.
Sources and further reading
– Board of Governors of the Federal Reserve System, Report on the Economic Well‑Being of U.S. Households in 2020 (May 2021) and Report on the Economic Well‑Being of U.S. Households in 2018 (May 2019).
– Federal Deposit Insurance Corporation, How America Banks: Household Use of Banking and Financial Services — 2019 FDIC Survey.
– FDIC, 2017 National Survey of Unbanked and Underbanked Households: Executive Summary.
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.