Underbanked

Definition

Underbanked describes people or households that have a bank account but frequently rely on alternative financial services—such as payday loans, check‑cashing services, money orders, prepaid cards, and other nonbank products—to meet their everyday financial needs.

How the underbanked use financial services

Underbanked consumers may:
* Use cash or prepaid products for transactions.
* Turn to payday and short‑term loans for emergency or routine funding.
* Rely on check‑cashing services, money orders, or third‑party bill‑payment services instead of bank accounts or direct debit.
* Avoid or underuse credit products (credit cards, traditional bank loans) offered by mainstream banks.

How many people are underbanked

Key estimates from U.S. surveys:
* The Federal Reserve reported that in 2020 about 13% of U.S. adults were underbanked and 5% were unbanked. This was an improvement from 2018, when 16% were underbanked and 6% were unbanked.
* The FDIC reported about 5.4% of U.S. households were unbanked in 2019. In 2017 the FDIC estimated roughly 48.9 million adults (about 18.7% of households) were underbanked.
Note: the Federal Reserve and FDIC use different definitions and survey methods, so their figures are not directly comparable.

Who is underbanked

Underbanked and unbanked populations are disproportionately likely to have:
* Low incomes and less formal education. Among the underbanked, 21% had family income under $25,000, while only 5% had incomes over $100,000. About 24% lacked a high school degree versus 8% who had a bachelor’s degree or higher.
* Racial and ethnic disparities. Reported underbanked rates included roughly 27% of Black respondents and 21% of Hispanic/Latino respondents, compared with about 9% of White respondents.
* Less access to credit. Applicants with incomes under $50,000 face higher denial rates for traditional bank credit (about 39%) than applicants with incomes over $100,000 (about 9%). Within each income group, Black and Hispanic/Latino applicants are more likely than White applicants to experience adverse credit outcomes.
* More volatile or unpredictable incomes, which correlates with heavier use of alternative financial services.

Why people become underbanked

Common contributing factors:
* Cost and access barriers at traditional banks — account minimums, fees, and strict lending criteria.
* Perceived or real lack of convenience (branch locations, hours, digital access).
* Aggressive marketing and easy availability of alternative services (payday lenders, check‑cashers).
* Income volatility that makes mainstream credit products or minimum balance requirements impractical.

Consequences and behaviors

Underbanked households often pay more in fees and interest for basic financial needs, which can reinforce financial instability. Typical behaviors documented in surveys include using money orders (about 11.9% of households in one FDIC study), cashier’s checks (5.5%), and third‑party bill‑payment services (4.9%).

Unbanked vs. underbanked

• Unbanked: no checking or savings account at a bank or credit union.
• Underbanked: has a bank account but routinely relies on alternative, often higher‑cost financial services.

Help and resources

Community development financial institutions (CDFIs) provide lending and financial services targeted to underserved communities, including homebuyer and small‑business loans. Seek local CDFIs, credit unions with low‑fee accounts, or banks that offer tailored small‑dollar or low‑minimum accounts as alternatives to higher‑cost nonbank services.

Key takeaways

• Underbanked households have bank accounts but frequently use alternative financial services for transactions and credit.
• A significant share of underbanked adults are lower income, less educated, and from racial or ethnic minority groups.
• Barriers such as fees, minimums, strict credit criteria, and income volatility help explain why many people remain underbanked.
• Community lenders and low‑cost banking options can help reduce reliance on high‑cost alternatives.

Sources (selected)

• Board of Governors of the Federal Reserve System, Report on the Economic Well‑Being of U.S. Households (2018, 2020)
• Federal Deposit Insurance Corporation, How America Banks: Household Use of Banking and Financial Services (2019)