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Who Are America's Unbanked and Underbanked?

As a merchant, it’s beneficial to understand the financial background and spending habits of your customers. This information can help your business to be more profitable and help you better meet the needs of your customers.

If your customers are categorized as “unbanked” or “underbanked” consumers, it’s important for you to understand what those terms mean. Here are the definitions and some valuable statistics.

Unbanked Consumers

Approximately 9 million U.S. households are considered to be “unbanked,” according to the Federal Deposit Insurance Corporation (FDIC). Unbanked is a term commonly used to describe consumers who do not have a bank account and, instead, choose to use alternative financial services.

When it comes to unbanked consumers, national statistics shows that they most often live in large, urban cities. Check out the top 10 U.S. cities with the largest unbanked populations. About 7 percent of Americans are considered unbanked with Miami, Detroit and El Paso, TX, topping the list of unbanked cities.

Underbanked Consumers

In addition to this unbanked population, there is another estimated 21 million U.S. households that are categorized as “underbanked.” Underbanked consumers are defined as people with a savings or checking account at a financial institution who opt to rely on alternative financial services in their daily lives. These financial alternatives include check-cashing services, payday loans, money orders and pawn shops.

Key Demographics

According to the FDIC, the majority of unbanked and underbanked consumers are categorized as low income and minority with little education. The unbanked also often accounts for a high number of immigrants in the U.S.

Here are some FDIC statistics:

  • 1 in 5 unbanked households earn less than $30,000 annually
  • 1 in 5 African-American households are unbanked
  • 1 in 3 African-American households are underbanked
  • 1 in 6 Hispanic households are unbanked
  • 3 in 10 Hispanic households are underbanked
  • 1 in 6 households headed by a working-age disabled adult were unbanked
  • 3 in 4 teens between ages 15-17 were unbanked
  • 5 in 10 adults between ages 18-20 were unbanked

Common Reasons

FDIC survey respondents cited high fees and excessive costs to maintain retail bank accounts. Some also said that minimum balance requirements at retail financial institutions were difficult to maintain in the face of unemployment and underemployment.

Both populations point to limited access to retail banks as reason they don’t use banking services. Research indicates that the distribution of bank branches across the U.S. is uneven, and that in recent years the greatest decline in branch closings occurs in low-income communities.

Some immigrants also cite language barriers when interacting with bank employees, reading banking literature and when using ATM machines, according to the FDIC. Others also point to a history of cultural distrust or past experiences with retail banks.
Simple Solutions

Thus, unbanked and underbanked rates could be lowered if more consumers had access to low-cost financial products to better meet their needs.

Increased access to financial institutions and to financial education may be beneficial so consumers understand the higher fees they face without traditional banking accounts. For example, Wal-Mart charges $3 to cash checks of $1,000 or less. And many check-cashing services charge up to 3 percent of the cashed check, which means the average person is paying over $24 to get an $800 check.

In contrast, a Bankrate.com survey found that fees to maintain a checking account averaged only $5.54 each month. There also should be greater understanding around the fees associated with traditional banks such as, inactivity fees, overdraft fees and insufficient fund charges.

Thus, fostering relationships with community banking institutions may be a helpful resource in urban areas. Consider keeping resources and promotional information available for your unbanked and underbanked customers to help them gain access to financial products and services.  You could make an even bigger difference with in-store solutions that make a cash-reliant life that much easier. This can help build stronger relationships with your community. It may also build loyalty since your customers will see that your store provides financial resources for patrons.

in Building Your Business, Consumer Trends, Industry News, The Banking Revolution