Why the US population of unbanked and underbanked is growing

February 29, 2016

The state of personal finance is changing largely in part to millennials and lower-income households. These consumer groups are less likely to used traditional banking methods than ever before, leading to a rise in unbanked and underbanked individuals. Instead, they prefer conveniences like electronic payments, mobile banking and prepaid services such as payroll cards.

According to a study by Reportlinker, 40 percent of consumers ages 18 and older were unbanked as of 2015. This is over four times the amount seen in 2008 – 9 percent. Reportlinker said this number suggests banks either fail to serve a large market of consumers or are suffering in the face of competition.

Surveying the unbanked and underbanked

The Federal Deposit Insurance Corporation has looked into the phenomenon of unbanked and underbanked consumers within America since 2008. Its aim is to understand why these groups choose to forgo the benefits of a traditional banking institution to help banks better serve these consumers and increase public trust.

The FDIC separates people who do not use banks to fully serve their financial needs into two distinct categories. The unbanked have no ties to an insured economic institution. Essentially, they have no checking or savings account and no debit or ATM card. Meanwhile, the underbanked do use some of these services – often a checking account – but they also used alternative financial options within the past year.

According to the FDIC's 2013 National Survey of Unbanked and Underbanked Households, approximately 46 percent unbanked U.S. homes – 3.6 percent overall – had some form of financial account in the past. Meanwhile, 0.7 percent of consumers switched to unbanked that year. These households were more likely to have undergone a significant financial burden – 34 percent had either lost their job or suffered a drastic decrease in income. 

As a result, many unbanked and underbanked consumers turned to prepaid cards to serve their financial needs. Such cards were most commonly used by unbanked homes in 2013 – 22 percent of them had used a card within the prior year. Only 13 percent of underbanked consumers and 5 percent of fully banked consumers did the same. Unbanked consumers also used their cards more frequently than the other two, reloading them at a rate of nearly 58 percent. Underbanked shoppers, however, weren't far behind with their reload rate of approximately 43 percent. Fully banked prepaid card users reloaded theirs at a rate of less than 24 percent.

Millennials and banks

Although the FDIC did not completely break down consumers users by demographic, it did note unbanked and underbanked individuals tended to be either young, low-income, unemployed or a non-Asian minority. There have been many reports on millennials' reluctance to use traditional banks, and TechCrunch blamed the financial institutions themselves. According to the site, banks are still too preoccupied with the desires of older consumers and haven't adapted to the needs of the young workforce. These rising adults are concerned with student debt and getting monetarily stable after entering the workforce during a global financial crisis. The banks, meanwhile, still focus on mortgage lending, investment and retirement. These are great products for older generations whose ideas of independence consisted of home and car ownership, marriage and retirement. However, most millennials choose to delay such concepts in their personal lives in favor of what they consider more pressing matters.

TechCrunch also made the case for faster, mobile-based banking. A fund transfer should be simple to arrange and happen instantly. While bank have tried to automate their processes more, they have yet to provide fully capable online payment services.

Being unbanked is more costly for low-income individuals

Meanwhile, Time magazine found a few reasons why low-income unbanked and underbanked consumers go without a traditional financial account. Many simply don't have the time or money. Living paycheck to paycheck means one is less likely to have the minimum funds needed to establish or maintain a checking or savings account. It also means a consumer probably has other pressing needs in his or her personal life and does not have the time to get to a bank during business hours. At the same time, however, these individuals need access to their money as soon as possible.

Payroll cards are beneficial in such situations. These are preloadable options provided by employers where a person's paycheck is deposited directly onto the card. Money is available just as quickly as direct deposit but without the required bank account.

Time also found some banks don't go out of their way to approach low-income individuals. Many don't offer products for consumers they feel aren't profitable, and those required by law to offer low-cost banking tend not to advertise their services. Instead, these individuals find better benefits with general purpose preloadable cards.

Consumer attitudes toward prepaid cards are changing. The cards themselves are more widely used and advertised, and individuals find them more advantageous and accessible than a traditional checking account.

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