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In-Depth: Reaching the Unbanked and Underbanked


Martha Perine Beard
Friday, January 1, 2010

The word unbanked is an umbrella term used to describe diverse groups of individuals who do not use banks or credit unions for their financial transactions. They have neither a checking nor savings account. As bankers, you may find the following data useful when exploring the unbanked and underbanked in your community.

Some consumers are unbanked for a variety of reasons. These include: a poor credit history or outstanding issue from a prior banking relationship, a lack of understanding about the U.S. banking system, a negative prior experience with a bank, language barriers for immigrant residents, a lack of appropriate identification needed to open a bank account, or living paycheck to paycheck due to limited and unstable income.

Underbanked consumers have either a checking or savings account, but also rely on alternative financial services. The FDIC estimates that the underbanked population includes about 43 million adults and 21 million households. These households use non-bank money orders or non-bank check-cashing services, payday loan institutions, rent-to-own agreements or pawn shops on a regular basis. Blacks, Hispanics and Native Americans are the most likely Americans to be underbanked.

The most common groups of unbanked persons include low-income individuals and families, those who are less-educated, households headed by women, young adults and immigrants. As part of the Census Population Survey sent nationwide in 2009, the FDIC asked finance-related queries to help build the database on household banking habits. Responses showed that almost one in 10 households do not use a bank at all. When compared with the 9 percent estimate gathered in the 2001 Federal Reserve Survey of Consumer Finances, the percentage of unbanked consumers appears to have remained relatively stable. The survey further estimated that nearly 9 million households (approximately 7.7 percent of the population) are unbanked. The unbanked population includes about 17 million adults, with 21.7 percent blacks, 19.3 percent Hispanics and 15.5 percent Native Americans.

Encouraging the unbanked to handle payments through the financial mainstream is important for a number of reasons. Having a checking and savings account is an important first step in establishing that the consumer has the financial acumen to apply for credit for a car or home. It also permits a consumer’s payroll check to be automatically deposited into a checking account, and lets the consumer arrange to have a specified amount automatically transferred to the savings account each pay period.

But, the key advantage to consumers having bank accounts is avoiding costly alternative financial services and enabling families to build and protect their wealth. Unbanked consumers spend approximately 2.5 to 3 percent of a government benefits check and between 4 percent and 5 percent of payroll check just to cash them. Additional dollars are spent to purchase money orders to pay routine monthly expenses. When you consider the cost for cashing a bi-weekly payroll check and buying about six money orders each month, a household with a net income of $20,000 may pay as much as $1,200 annually for alternative service fees—substantially more than the expense of a monthly checking account fee.

The direct cost of being unbanked will vary based upon the number and type of checks cashed and the number of money orders purchased. There are indirect costs as well, according to a Boston Fed study. Unbanked individuals frequently lack sufficient credit histories to satisfy the requirements of traditional lenders, whereas a bank account helps build a credit history.

Still, more expensive, check-cashing outlets remain popular for a number of reasons. They are frequently located in low- to moderate-income areas and transportation to them is less difficult. In many cities and towns, the number of alternative financial service providers (check cashers, title lenders and payday lenders) far exceeds the number of bank and credit union branches in these areas. In addition to convenience, alternative financial service providers offer a range of convenient payment services in one location: They cash paychecks, sell money orders with stamped envelopes, serve as agents for utility bill payments and can transmit funds electronically for money transfers.

Addressing the Memphis Area Unbanked and Underbanked

The FDIC estimates 96,000 unbanked households in the Memphis MSA. To address this issue, the Memphis Branch is partnering with the City of Memphis and the nonprofit RISE Foundation to launch Bank on Memphis this December. This community-wide effort is intended to decrease the number of unbanked residents in Memphis through gaining 5,000 new customers in the first year. The campaign is based on successful models in San Francisco, Seattle and Evansville, Ind.

Banks and credit unions will be asked to develop checking accounts and savings accounts targeted towards low-income households. After these products are developed, the banks will work closely with non-profits and community groups to promote them. This is in addition to what some banks already do, such as locating branches in grocery stores and hiring multilingual staff.

Unbanked and Underbanked Households

Percentage by State Unbanked Underbanked Banked Status Unclear
Arkansas 10.1% 22.3% 69% 3.4%
Illinois 6.2 15.7 75.4 2.7
Indiana 7.4 16.8 71.3 2.8
Kentucky 11.9 23.7 62.7 1.8
Mississippi 16.4 25.2 55.1 3.3
Missouri 8.2 19.3 69 3.4
Tennessee 9.9 17.5 69.4 3.2
United States 7.7 17.9 70.3 4.1
Eighth District Zones
Little Rock 7.3% 25% 69.3% 3.9%
Louisville 7.6 17.5 74.2 0.6
Memphis 17.3 17.4 59.1 6.2
St. Louis 7.5 22.4 65.9 4.2

SOURCE: 2009 FDIC National Survey of Unbanked and Underbanked Households.


1 State figures encompass entire states and thus are not limited to Eighth District counties.

2 Status unclear means that respondents may be banked, but their use of alternative services is not known.

3 Due to the nature of the data, percentages may not equal 100.