On my way to the grocery store one morning, I stopped at an ATM to withdraw some money. I could see from the receipt balance that my work check had just been direct-deposited into my checking account.
When I returned home, I turned my attention to paying bills and wrote out several checks. When I balanced my checkbook, I noticed the automatic withdrawals on my auto and homeowners insurance went through.
My actions were some that many of us do every day, but they highlight a disparity many people take for granted. While almost 108 million or 82% of U.S. households are fully banked, millions don’t have access to basic banking services. Low-income and communities of color are some of the most vulnerable.
How Many Americans are Unbanked?
An estimated 5.9 million American households were unbanked in 2021, meaning no one in the house had access to a checking, savings or credit union account. Last year, the overall unbanked rate was the lowest since the FDIC began the survey in 2009, but those numbers don’t tell the complete story.
“We’re heartened by the progress that we’ve been tracking since 2009, but it’s obvious when you dig deeper than the top line number, work remains to be done, especially for specific subpopulations,” says Karyen Chu, Chief of Banking and Consumer Research at the FDIC Center for Financial Research.
While unbanked rates vary considerably across the U.S. population, they are the highest among groups like low-income and households of color. When examining households that earn between $30,000 and $50,000, 8% of Black households and 8.4% of Hispanic households were unbanked, compared with 1.7% of white households.
“Even when you take into account income, the disparities in unbanked rates between Black, Hispanic and white households persists at every income level,” she adds.
Unbanked rates were also higher among less-educated, single-mother and working-age households with a disability. Almost 19 million households are underbanked, meaning they have a checking or savings account but rely on money orders and services like check cashing or pawn shops to meet their credit needs.
Why Are People Unbanked?
According to the FDIC, the top two reasons for not having a bank account were insufficient money to meet the minimum balance requirements and a lack of trust in banks.
Most banks and credit unions require that you maintain a minimum balance in a checking or savings account to avoid fees or interest. You may need to have a certain amount in your account by the end of each day or combined minimum balances for all your accounts with the institution.
“It’s good for business to be attractive to more people and that tradition of having high balance requirements on every account and every relationship is bad for business,” says Jaimes Johnson, Director of Community Partnerships at UW Credit Union. “That exclusion prevents you from getting new customers and members who may not have the assets necessary to meet those minimums but who could be at the forefront of your future sustainability.”
A history of discriminatory banking practices against people of color, including redlining and the subprime mortgage crisis which began in 2007 has made some people of color wary of financial institutions.
“We should not be under any illusion that some segments of the population have not always had a great relationship with financial institutions. We need to acknowledge that historically not everyone has had equal access to banking,” says Chiwuike Owunwanne, Corporate Responsibility Officer and Community Relations Manager at KeyBank (No. 18 on DiversityInc’s 2022 Top 50 companies for Diversity list).
“We’re seeing the fruits of past practices come to fruition. Trust is something that can be earned almost immediately, oftentimes, but then when you lose that trust, it’s harder to regain that trust. That will take decades and perhaps even longer than decades.”
Unbanked households also believe that bank fees are too high and unpredictable.
“There’s this feeling that there are not enough benefits from banking that are meaningful enough to outweigh perceived risks,” says Darlene Goins, Executive Vice President, Head of Banking Inclusion Initiative at Wells Fargo (No. 29 on DiversityInc’s 2022 Top 50 companies for Diversity list).
“Being hit with surprise fees or the potential of being hacked because their money is being stored in a nebulous, electronic world that makes it susceptible to fraud – these are all perceptions that came through in our qualitative research.”
Disadvantages of Being Unbanked
Being unbanked comes at a cost for low-income and communities of color.
At the pandemic’s start, millions of unemployed Americans without bank accounts waited weeks to receive their paper stimulus checks. The annual cost of not having a bank account is more than $196 for people that use a prepaid debit card that features direct deposit, according to a 2016 analysis from NerdWallet.
To meet their needs, unbanked households turn to nonbank credit products or services like rent-to-own, payday loans or tax refund anticipation checks. In 2018, financially underserved consumers spent $189 billion in fees and interest on financial products, according to the Financial Health Network. The disadvantages trickle-down in other areas, harming the ability of unbanked households to save for emergencies or access credit.
“A constituency who can afford it the least, they end up costing them the most,” says Johnson.
“Those dollars that could go into a savings account, paying for essentials, towards investing or saving for a home are unavailable because they are attached to the use of those alternative financials.”
Being unbanked can also make everyday tasks more complicated. Unbanked individuals pay bills using money orders and carry cash for everyday expenses. They don’t have direct deposit and have to rely on check cashing services to cash their paychecks. NerdWallet’s research indicates that unbanked individuals incur annual costs of almost $199 for check cashing and money order services.
“On top of poverty or poor financial health, their money is less secure,” says Ralph Kelly, Senior Vice President, Underbanked Segment Product Manager at KeyBank. “In terms of direct deposit, funds are safer in banks than keeping the cash at home. Because, when money is not in the bank, it can’t accrue interest.”
Owunwanne recounts an older Black woman he met over the summer at a KeyBank KeyBus initiative. The woman explained to him that she has never had a bank account because she doesn’t trust banks. Where does she store her money? Under a mattress.
“In 2022, you don’t think that that’s possible, but this was very real for her,” he says. “I tried to walk her through some inherent risks of keeping your money under a mattress. It’s not FDIC-insured. That’s first and foremost. Then on top of that, God forbid you have to leave your house in the dead of night because a fire engulfs your home. Trying to grab your money from under a mattress is probably the last thing you’re going to think of.”
How to Bank the Unbanked
Federal agencies have worked to improve banking access, with the FDIC piloting a public awareness campaign on the benefits of bank accounts. A 2021 report from the American Bankers Association has cited solutions to banking the unbanked, like improving financial education, enhancing existing programs and highlighting no- and low-cost bank account offerings.
Johnson says education for low-income communities and people of color should involve moving away from the traditional financial literacy model.
“What is important is financial literacy to financial capability,” he says. “It’s not just having the knowledge, it’s the ability to do something with that knowledge. To be able to understand it and use it.”
More financial institutions are offering accounts with no overdraft fees and no minimum daily balance requirements. Institutions like KeyBank, UW Credit Union and Wells Fargo are also reaching out to consumers where they live by partnering with national and local organizations and launching financial wellness initiatives.
“All of these actions are a meaningful part of our broader financial inclusion work and ways we can drive meaningful change in diverse communities,” says Goins.
Owunwanne knows that solving the unbanked problem is not possible overnight, but he is determined to make a difference. Two weeks after meeting that older Black unbanked woman at a KeyBank event, he ran into her at a food pantry. Did he succeed in getting her to trust the banking system?
“It’s going to take some time, it’s going to take many conversations to replace that prior experience with a different, new and positive experience,” he says. “That experience may require months of encounters, education or just regular chatting. The fact that I ran into her two weeks later lets me know this is someone I’m probably going to run into again. Each time I run into her, I will try to build that trust.”