Unbanked States Of America: Life Outside The Financial System


Being part of the American financial system has not always been easy, but in more recent years the number of unbanked citizens, those living without a checking or savings account or no credit union has slowly but surely been coming down.

In a findings report by the Federal Deposit Insurance Corporation (FDIC), around 5.4% of American households were unbanked in 2020. That adds up to more than 7.1 million homes.

Though during the publication of these figures, movement was quite restricted by the COVID-19 pandemic, leaving many individuals stranded at home with minimal access to basic financial services.

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Yet, in more recent times, now that the pandemic has somewhat waned, a sizable portion of Americans are still seen as either unbanked or underbanked.

A current look at conditions has revealed that more than 14.1 million American adults are unbanked according to a most recent National Survey of Unbanked and Underbanked Households. This accounts for roughly 6% of the U.S. adult population.

The allure of the U.S. banking and financial services sector has been slowly fading, as many more people are losing trust in some of the country’s leading banks.

A report by LexisNexis highlighted several important and problematic issues surrounding America’s unbanked population. For the many without a credit, checking or savings account, a lack of transparency, support, and knowledge has withheld them in recent years from becoming fully banked.

Issues related to cybersecurity threats, online fraud, inclusion initiatives, money laundering, and regulatory compliance are just some of the many challenges that banks are having to deal with.

On the other side of the spectrum, banks are also seeing a slew of ongoing issues that are restricting them from accessing the information of those that are unbanked. Around 69% of respondents of the same survey revealed that contacting or connecting with unbanked or underbanked individuals is the hardest part of the onboarding process.

The financial ecosystem, which includes a variety of businesses, both public and private, has become – in the mind of the unbanked – synonymous with big corporations and a lack of transparency.

Although this isn’t the case in most instances, life outside the American financial system is only looking to become increasingly challenging and even harder.

Without the right paperwork, and social security information, the millions of unbanked Americans will only be pushed further into the abyss in the coming years as regulations change, and the financial services sector becomes increasingly digital.

Who Are The Unbanked Americans?

Looking at the same data provided by the National Survey of Unbanked and Underbanked Households, the demographics of the unbanked look as follows.

Around 16.9% of black and 14% of Hispanic households are unbanked, figures that make these minority groups five times more likely to be unbanked than their white counterparts.

The majority of unbanked individuals are those in low-income households and fall into low-income brackets. Roughly 19% of households with an annual income of $30,000 or less are classified as unbanked, compared to the 2.4% of households that make more than $30,000 annually.

Additionally, those underbanked Americans, who do have a bank account, but obtained non-bank alternative services in the last 12 months account for just under 50 million adults.

The challenge here is that uncertain economic conditions, and changing economic cycles have excluded lower-income households and individuals from becoming banked in the near future.

Higher interest rates, soaring inflation, and expensive banking fees are only adding more barriers.

The lack of attainable financial services, being too expensive, or even out of reach has left many of America’s unbanked and underbanked population to seek out alternative means to help them with basic financial tasks and services.

While alternative solutions are available, it’s not said to make it easier for those that are unbanked. Although it’s possible that personal installment loans allow individuals to borrow more money as opposed to other short-term personal loan options, it still comes with a specific level of financial security many unbanked Americans may not have. On the back of this, many adults who do not have access to the right financial services or products will also find an increase in their risk amid recessionary conditions.

Carrying The Burdens

For the millions of unbanked, or underbanked Americans, life outside the financial system looks a lot different compared to its banked counterparts.

In a report by the U.S. Postal Service, it was found that underserved members, who have limited access to financial services are paying more in bank-related interest and fees. The report found that on average, underbanked families use roughly 9.5% of their annual income to pay for fees.

On average, these underserved households pay roughly $2,412 annually on interest and fees, and consumers with checking accounts pay on average $100 annually in overdraft and non-sufficient fund fees.

Unbanked adults are also falling victim to payday lenders that offer fast loans with interest rates as high as 500% according to the most recent data. To put this into perspective, an average credit card may charge the borrower an Annual Percentage Rate (APR) of 28 to 36%. Payday loan providers have an APR of 398% on average.

Being underbanked is not only making it harder to become financially stable, but it’s also increasingly expensive to manage this sort of lifestyle as well.

Those whose banking needs have not yet been fulfilled are also struggling to save for important events, purchases, and other emergencies.

Some reports have revealed that unbanked adults have a savings rate of 17.4%, compared to 56.3% of underbanked, and 61.6% of fully banked individuals.

The slow rate of saving for emergencies, or even the lack of an emergency fund is making it difficult for many people to become financially prepared for any unforeseen expenses.

What’s more, the Federal Reserve found that around 36% of Americans do not have enough money to cover a mere $400 emergency expense. On average, 78% of Americans have an emergency savings account, with 51% having $5,000 or less in savings. Only 35% have $1,000 or less available in their savings account at the time of observation.

The lack of savings and financial security is not only hitting those that are unbanked, but it’s also causing headwinds for a majority of America’s banked residents.

Having minimal or no savings aside amid a changing economic cycle has left many Americans fearful over whether they’ll be able to outlive a sudden economic downturn. During a time of furlough, layoffs, business closure, and furloughs, much of which we experience during the pandemic; being prepared is one of the most crucial aspects for both banked and unbanked Americans.

The lack of access to credit, and credit cards is also another major burden carried by underrepresented communities. Without the proper information and social security, individuals will find it hard, and ultimately impossible to borrow money or establish a credit score.

While there are alternative solutions available in the marketplace, reasonable interest rates are making it painstakingly expensive for people to take out larger loans.

Though the lack of credit and access thereof is withholding many from improving their wealth, there is a handful of unbanked households (7.2%) who still hold credit via a credit card, a more frequented on-ramp to credit-building.

Credit in some areas of the financial system can prove to provide more access to a range of different products and services that can help individuals become more financially independent in garnering their wealth.

Addressing The Issues

Although it’s not as simple as one may think, having to source out the unbanked individuals scattered across the country, the best possible solution would be for both banks and government institutions to combine their efforts to include more underrepresented communities within the financial system.

Even these collaborative efforts can still pose a lot of challenges, and while there are a lot of obstacles, in the coming year banks may be able to push down the rate of unbanked residents even further.

Before this can happen, financial institutions, alongside the aid of the government and other private entities will need to resolve internal problems related to transparency, data capturing, and digital security. As we’ve seen, most of America’s unbanked remain anonymous blatantly because of a lack of transparency between financial institutions and the general public.

The bottom line is, sooner or later, the unbanked and underbanked will need to make a financially viable decision. High costs and fees, eye-watering interest rates, and a lack of savings are not helping them become freer from the financial system, it’s only pushing them further towards the abyss of poverty.