Unbanked States of America: Life Outside the Financial System

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Being a part of America’s financial system hasn’t always been easy, but in recent years the number of unbanked citizens, those without a checking or savings account, or those without a credit union has slowly but surely declined.

In a report by the Federal Deposit Insurance Company (FDIC) about 5.4% of American households were unbanked in 2020. That accounts for more than 7.1 million households.

However, at the time these numbers were released, movement was fairly restricted by the COVID-19 pandemic, leaving many people stranded at home with minimal access to basic financial services.

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However, more recently, with the pandemic abating somewhat, a sizeable portion of Americans are still considered to be either unbanked or unbanked.

A recent look at the conditions reveals that more than 14.1 million American adults are unbanked, according to a recent study National Survey of Nonbanked and Underbanked Households. This accounts for about 6% of the US adult population.

The appeal of the US banking and financial services sector has slowly faded as more and more people lose faith in some of the country’s leading banks.

A report by LexisNexis highlighted several important and problematic issues related to America’s unbanked population. For the many without a credit, checking, or savings account, a lack of transparency, support, and knowledge has kept them from becoming fully bankable in recent years.

Issues related to cybersecurity threats, online fraud, integration initiatives, money laundering, and regulatory compliance are just a few of the many challenges that banks must contend with.

On the other end of the spectrum, banks also see a number of ongoing issues preventing them from accessing the information of unbanked individuals. Around 69% of respondents to the same survey said reaching out or connecting with unbanked or underbanked people is the most difficult part of the onboarding process.

The financial ecosystem, which encompasses a multitude of public and private companies, has – in the eyes of the unbanked – become synonymous with large corporations and a lack of transparency.

While that’s not the case in most cases, life outside of America’s financial system only gets more challenging and tougher.

Without the right paperwork and Social Security information, the millions of unbanked Americans will only be further pushed down the abyss in the coming years as regulations change and the financial services sector becomes increasingly digital.

Who are the unbanked Americans?

Looking at the same data provided by the National Survey of Unbanked and Underbanked Households, the demographics of the unbanked are as follows.

Roughly 16.9% of Black and 14% of Hispanic households are unbanked, figures that make these minority groups five times more likely to be unbanked than their white counterparts.

The majority of Unbanked persons are in low-income households and fall into low-income groups. Approximately 19% of households with an annual income of $30,000 or less are classified as unbanked, compared to 2.4% of households earning more than $30,000 annually.

In addition, among underbanked Americans, nearly 50 million adults who have a bank account have used alternative non-bank services in the past 12 months.

The challenge here is that uncertain economic conditions and changing business cycles have left households and lower income individuals banked out in the near term.

Higher interest rates, rising inflation and expensive bank fees only add more barriers.

The lack of accessible financial services that are too expensive or even unattainable has caused many of America’s unbanked and underbanked population to seek alternative means to help them with basic financial tasks and services.

Although alternative solutions are available, it shouldn’t be any easier for those who are unbanked. Although that is possible private installment loans Allowing individuals to borrow more money than other short-term personal loan options, it still comes with a twist level of financial security Many unbanked Americans may not have this. On the other hand, many adults who don’t have access to the right financial services or products will also find themselves at increased risk under recessionary conditions.

carry the burdens

For the millions of unbanked or unbanked Americans, life outside of the financial system looks very different than its banked counterparts.

In a report by US Postal Servicefound that underserved members who have limited access to financial services pay more bank-related interest and fees. The report found that low-bank families use, on average, about 9.5% of their annual income to pay fees.

On average, these underserved households pay about $2,412 a year in interest and fees, and consumers with checking accounts pay an average of $100 a year in overdraft and underfunding fees.

Unbanked adults also fall prey to payday lenders offering quick loans with interest rates as high as 500%, according to most current data. To put this in perspective, the average credit card can charge the borrower an annual percentage rate (APR) of 28% to 36%. Payday loan providers average an APR of 398%.

Not only does underbanking make it harder to become financially stable, it also makes it increasingly expensive to lead that type of lifestyle.

Even those whose banking needs are not yet met struggle to save for important events, shopping, and other emergencies.

Some reports found that unbanked adults have a 17.4% savings rate, compared to 56.3% of the unbanked and 61.6% of fully banked individuals.

Slow saving for emergencies or even the lack of an emergency fund makes it difficult for many people to prepare financially for unforeseen expenses.

Additionally, the Federal Reserve found that around 36% of Americans don’t have enough money to cover even $400 in emergency expenses. On average, 78% of Americans have an emergency savings account, with 51% having $5,000 or less in savings. Only 35% have $1,000 or less in their savings account at the time of observation.

The lack of savings and financial security not only hits the unbanked, but also creates headwinds for the majority of banked Americans.

Having minimal or no savings set aside amid a changing economic cycle has left many Americans concerned about their ability to survive a sudden economic downturn. At a time of furloughs, layoffs, business closures and furloughs, many of which we are witnessing during the pandemic; Being prepared is one of the most important aspects for both banked and unbanked Americans.

Lack of access to credit and credit cards is another major burden on underrepresented communities. Without the right information and social security, it will be difficult and ultimately impossible for individuals to borrow money or establish a credit history.

While there are alternative solutions on the market, reasonable interest rates make it tediously expensive for people to take out larger loans.

Although the lack of credit and access to it prevents many from improving their wealth, there are a handful of unbanked households (7.2%) that still have credit through a credit card, a more common gateway to building credit.

Credit in some areas of the financial system may prove to provide greater access to a range of different products and services that can help individuals become more financially independent to accumulate wealth.

addressing the problems

Although it is not easy to weed out the unbanked scattered across the country, the best possible solution would be for banks and government institutions to pool their efforts to bring more underrepresented communities into the financial system.

Even this concerted effort may still pose many challenges, and while there are many obstacles, banks may be able to further reduce the number of unbanked residents in the coming year.

Before this can happen, financial institutions, together with the help of the government and other private entities, must solve internal problems related to transparency, data collection and digital security. As we have seen, most unbanked people in America remain blatantly anonymous due to a lack of transparency between financial institutions and the general public.

The bottom line is that sooner or later the unbanked and unbanked will have to make a financially viable decision. High costs and fees, horrendous interest rates and a lack of savings do not help them to free themselves from the financial system, but only push them further into the abyss of poverty.

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