What it means to be an unbanked person

Why are people unbanked?

People may choose to be unbanked because they distrust banking institutions. Historically, the financial industry has exploited different demographics of people. In particular, the Black community has faced redlining and disparities in access to mortgage lending. This generational distrust may dissuade people from opening an account.

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Alternatively, people may be unbanked due to their financial status, whether they’re avoiding debt collectors or are unable to meet minimum balance requirements.

Balance requirements can be difficult for low-income households to meet. Many banks require accounts to maintain a minimum balance to waive the account’s fee. Additionally, for individuals with low balances, additional fees are a concern. Accounts with below zero balances can incur overdraft fees, which can be destabilizing and ruinous for individuals living paycheck to paycheck.

Costs of being unbanked

Navigating life as an unbanked person is costly. To access a paycheck, they use check-cashing services which charge service fees that may range from 1% to 12% of the check’s value; if your paycheck is $1000, bi-monthly fees could reach $240. To pay bills, unbanked people may use prepaid debit cards or money orders, which also incur additional fees.

Accessing credit also presents its own challenges. Payday loans have high-interest rates and are high-risk. As many unbanked people may already be in precarious financial situations, turning to payday lenders can worsen their financial health. And since unbanked people do not have access to a credit card, it is hard to develop their credit and access loans. Poor credit, or a lack of a credit history, may also inhibit their ability to rent an apartment or gain employment.

In addition to the financial costs, there is also a significant time cost. Banking institutions offer different features—such as direct deposit, online bill pay, autopay, and person-to-person payment—that make your life easier. Individuals using alternative financial services do not have access to these features. It takes longer for people to access their paycheck without direct deposits. They must visit alternative financial storefronts in person on top of the direct financial costs.

Solutions for unbanked people

Second chance banking

Second chance banking allows individuals who are barred from traditional checking accounts or are unable to maintain minimum balance requirements, access a bank account. So, how does it work? A bank reviews your ChexSystems report, which reports your banking activity like a credit report. If an applicant isn’t deemed to be a risk, they can open a bank account. By opening a second chance bank account, unbanked and other individuals barred from traditional checking accounts can rebuild their credit and banking history and access banking services.

If maintaining a minimum balance is an issue, there are now free banking options to accommodate this. Unbanked people can open an account, without a minimum balance, and handle their financial duties.

Secured credit cards

People with their credit in disrepair can prevent them from opening a bank account in many financial institutions. Another solution to rebuild credit, and become banked, is to get a secured credit card. A secured credit card requires a refundable security deposit. This security deposit places a limit on an account, so they don’t spend more than are able to. The security deposit is generally low and is a financially feasible option for people to build their credit.

Prepaid debit cards

If an unbanked person is unable to qualify for second chance banking, a prepaid debit card is a great temporary solution to process transactions. Prepaid debit cards are easily accessible, and cash can be loaded on a card. Purchasing prepaid debit cards do incur additional fees on their own but are a healthier option than most alternative financial systems.

Explore more banking options and budgeting tips, like how to open a new bank account and the differences between a credit union and a bank.