What it means to be unbanked or underbanked

You may have heard the terms “unbanked” or “underbanked” before. Unbanked describes people who do not use the services of any banking institution, and underbanked describes those who have insufficient access to financial services. Everyone can benefit from being banked, and the right bank account doesn’t need to cost you any money.

Unbanked vs. underbanked

Unbanked and underbanked sound almost like the same word, but their meanings are distinct:

• Unbanked. The FDIC defines an unbanked person as someone who does not hold either a checking or savings account with a banking institution insured by the FDIC. Unbanked people transact primarily in cash and store all their assets only in physical, offline formats.
• Underbanked. Using the FDIC’s definition, a person who is underbanked maintains an FDIC-insured checking or savings account but regularly uses alternative financial services such as payday lending. People who are underbanked may be obligated to frequently use costly financial services like check cashing, payday lending, and money transfer services because they have limited access to better banking options.

Four reasons why people don’t use banks

Some people are unbanked by choice. Others are underbanked, with a desire for equitable access to financial services. Here are four reasons why some people don’t use banks:

1. Insufficient or no banking access. Some people might not use any bank because opening a bank account is difficult or impossible for them. Most banks require a physical address and proof of residency, like a utility bill, which can present a major obstacle for the most vulnerable populations.

Underbanked people, despite holding one or more bank accounts, may live in areas that are not well served by any major banking institutions. Online banking should theoretically help overcome that problem, but first you need access to a banking app and/or computer and Internet access—things that many of us take for granted.

2. Concerns about banking fees. Some people are unbanked because of concerns about banking fees. Despite the wide availability of no-fee checking and savings accounts, a common perception among the unbanked is that bank account fees are too high. Another obstacle to adoption for the unbanked is the complexity of banking fee structures, which can make account fees seem unpredictable.

3. Poor financial self-image. People who have low or unstable incomes are susceptible to having a poor financial self-image, and that can lead to the decision not to open a bank account. The self-perception of not having “enough” money can lead a person to believe that a bank account is not right for them.

4. Distrust of banks. Major financial institutions can seem opaque, and banking scandals do unfortunately occur—causing some people to distrust all banks. For those who are especially concerned about privacy, not using any bank can seem to make sense. Banks are required to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, meaning they are obligated to collect customers’ personal information.