What Is Unbanked?

Unbanked is an informal term for adults who do not use banks or banking institutions in any capacity. While often an issue in the developing world, there are also pockets of unbanked adults in developed countries, including the United States.

Understanding the Unbanked

Unbanked people generally pay for things in cash or purchase money orders or prepaid debit cards. Unbanked people also typically do not have insurance, pensions, or any other type of professional money-related services. They may take advantage of alternative financial services, such as check cashing and payday lending, if such services are available to them.

Unbanked vs. Underbanked

Underbanked is a related term. It refers to families who have checking or savings accounts but often rely on alternative financial services such as money orders, check-cashing services, and payday loans, as opposed to traditional loans and credit cards, to manage their finances.

Unbanked Households in the United States

A Federal Deposit Insurance Corp. (FDIC) study revealed that more than 5.9 million or 4.5% of American households were unbanked in 2021 in the United States, which is the fewest recorded since its survey was first conducted in 2009. In its 2019 study, the FDIC estimated that 7.1 million or 5.4% of households were unbanked.

The FDIC stated in 2019 that unbanked rates tend to be higher among certain segments of the population, namely households with low, volatile, or no income (the FDIC stopped asking about income volatility in its 2021 report). Education can also be influential, as people without a high school diploma were deemed more likely to be without a bank account.

Black and Latinx households are overrepresented among the unbanked, according to a Boston Consulting Group analysis of FDIC data. While they make up 32% of the U.S. population, they represent 64% of unbanked households.

The rate of unbanked households varies greatly from one state to the next. The highest rate of unbanked households remains in the South at 4.9%. Unbanked households in the remainder of the country were as follows:

• 4.2% of households in the Midwest
• 4.2% in the West
• 4.1% in the Northeast

Mississippi had the highest rate of unbanked households, at 11.1%. Utah had the lowest rate, at 1.2.

Why People Become Unbanked

The main reason for being unbanked, according to the FDIC study, is cost—those who are unbanked can’t meet banks’ minimum requirement balances. Another way of looking at it: Traditional banks don’t provide access to the financial services and products that unbanked populations need. For instance, someone living paycheck to paycheck with very low or volatile income may not be able to wait for a paycheck to clear at a bank. So they turn to a check-cashing service, which will provide cash immediately, albeit for a fee.

In neighborhoods that are “bank deserts,” such alternative financial services are also likely more common and open longer hours—in other words, more accessible and convenient than arranging for transportation to and from bank branches during limited banking hours. These high transaction costs (e.g., time/cost to visit bank branches, inconvenient hours), lack of clarity about fees, and alternative products that provided a more compelling value proposition have all been identified as reasons why people are unbanked.

Lack of trust in banking institutions can also come into play. Distrust was the second main reason cited in the FDIC study for being unbanked—not surprising given the history of lending discrimination experienced by Blacks and Latinx in the U.S. and the lingering inequities. For instance, predominantly Black and Latinx neighborhoods have been targeted for predatory lending, including subprime mortgages. Recent immigrants who experienced banking crises in their countries of origin may also lack trust in banks.

Being unbanked is sometimes attributed to people’s lack of financial literacy or knowledge of banking products. But about half of unbanked people have previously held a bank account, so they are familiar with banking services.

Initiatives to Help the Unbanked

Various state and federal programs have been aimed at helping the unbanked gain access to banking services and financial literacy. Some such initiatives include former California Gov. Arnold Schwarzenegger’s Bank on California Initiative and the FDIC’s Money Smart program.

The U.S. Treasury Department’s Section 326 regulations, which allow banks and credit unions to accept identification issued by foreign governments, seek to help undocumented immigrants become banked. The Treasury Department also makes federal payments to unbanked federal benefits recipients using a Mastercard prepaid debit card.