I’ll never forget setting up my first bank account as a kid. My mom drove me over to the local bank to set up a savings account where I could deposit cash and checks, including annual birthday gifts from family and any other money I came upon at a young age.
When I was 16, my mom took me to the grocery store branch of a Nationwide bank to get my first checking account. While this “free checking for life,” didn’t quite live up to its name, having a checking account did give me access to a financial system that many Americans don’t have the knowledge or ability to enjoy.
Looking at households that look like the one I grew up in, I figured everyone took checks to the bank to make a deposit. I thought most people would send money to others using a check, or later an online service like Venmo or PayPal. As an adult, I learned that is far from the case.
Who is unbanked and underbanked?
Being unbanked means an individual or family has no traditional bank accounts at all. Underbanked households have a checking or savings account but also use alternative financial services such as money orders, check cashing, international remittances, payday loans, refund anticipation loans, rent-to-own services, pawnshop loans, or auto title loans, according to the FDIC.
While about 97% of white households have all of their banking needs met, the numbers are not nearly the same for America’s minority populations. 2017 data from the FDIC shows that 3% of white households are unbanked. However, about 17% of black and 14% of Hispanic households don’t have bank accounts. When you expand that to include the underbanked, those who have accounts but lack access to some essential banking services, about 30% of black households and 29% of Hispanic households are missing out.
According to the 2017 FDIC National Survey of Unbanked and Underbanked Households, the most likely populations to not be fully banked are lower-income households, less-educated households, younger households, black and Hispanic households, working-age disabled households, and households with volatile income.
Why are some households unbanked and underbanked?
According to the FDIC survey, there are several common reasons U.S. households don’t have a bank account.
- Not enough money: More than half of those who are unbanked say that they don’t have enough money to keep in an account. This is the most common reason to not have a bank account.
- Don’t trust banks: About 30% of respondents said that they “don’t trust banks.” This is the second most common reason to not have a bank account.
- Bank fees: The third most common reason to not have a bank account is bank fees. Many people said that fees were either too high or too unpredictable.
While these are common reasons to not have a bank account, the best solution is choosing a bank you can trust that offers low-fee accounts with no minimum balance requirements. When you choose an account with no recurring fees and favorable fee structures for customers, you can rest easy that your money is safe, insured, and won’t be subject to surprise charges.
Some consumers don’t have accounts because they are not conveniently available or they lack financial literacy. If there are no nearby banks, it may not be possible for many Americans to open a bank account even if they do have the time and money to do so. One of the best solutions for this, if internet access is available, is to set up an online bank account through a bank like Chime.
Accessing your payroll from work
According to NACHA, the organization responsible for managing the nation’s direct deposit system, 82% of Americans are paid via direct deposit. But if you don’t have a bank account, getting paid via direct deposit isn’t an option.
You also don’t have the ability to deposit your paycheck into your checking account with your phone, a free service that takes less than 30 seconds. Instead, you have to cash your paycheck with a check-cashing service. It could look like this:
- Cash the check at the issuing bank: Most banks will cash a check drawn on a customer’s account. Some charge a flat fee of a few dollars for this service while others will do it for free. Either way, you have to take a trip to the check writer’s bank, not your own, to do this.
- Cash the check at a grocery store: Supermarket chains like Walmart and Kroger offer check cashing partially because they hope you will spend your money there. Walmart charges $4 or $8 to cash a check. At Kroger-owned stores, fees start at $3 per check cashed and vary by state.
- Payday loan or check cashing stores: Fees are often higher at check-cashing or payday loan centers. They often require a flat-fee plus a percentage of the check amount.
I had never tried to cash a payroll check until a few years ago when I participated in FinX from the Center for Financial Services Innovation. I was sent into Hollywood with a payroll check and a list of errands. Before even getting to the errands, I had lost about 7% of my check to fees while spending over a half hour getting the cash. But this is normal without a bank account.
Paying the gas or power bill
When your electricity, gas, or water bill shows up in your mailbox or email inbox, you might have it set to pay automatically with a checking account, credit card, or debit card. But if you don’t have those accounts, you need to pay another way.
Instead of paying for free with a few taps on your phone or clicks on your computer screen, paying utilities without a bank account requires a bit more effort. You might be able to pay at a local office or grocery store, but you can’t always pay with cash and you might have to pay additional processing fees if you go this route.
Other options include mailing a money order, which takes a fee of a few dollars, a stamp, and an envelope or a prepaid debit card, which also requires fees and more time to load the card.
In any case, paying bills without a bank account takes a lot more time and often more money. In many ways, it’s like an added tax for being poor or not knowing about how the banking system works.
Making a purchase where only debit or credit cards are accepted
Debit cards, and often credit cards, are another financial service most people take for granted. You can just take that card anywhere you go and swipe it to pay. In most cases, you won’t pay any extra fees.
But what about businesses that don’t take any cash? If you want to shop online at Amazon, ride in an Uber, or visit a business that doesn’t take cash, you need a plastic card to pay. Without it, you could have to pay more to shop at a local store instead of online or pay more for a traditional cab instead of a ride-hailing service.
The solution here is another one that comes with extra fees and probably sucks up hours of time. Prepaid cards, which you often see at convenience stores and grocery stores, give you many of the features of a debit card. However, you usually have to pay to buy one, pay to load them, and have extra fees depending on how you use the account.
When I tried one out during the FinX experience, I spent about $5 in fees to buy and load a card and it didn’t even work. After a half-hour on the phone waiting and talking to customer service, my team realized the money might be locked up for a day or more.
When you’re already living paycheck-to-paycheck, that could lead to late fees or skipping dinner for your family. Prepaid cards are okay when they work, but they’re still an extra expense low-income people have to pay that those with bank accounts don’t.
Sending money to family or friends
When splitting a cost with family or friends, or sending money for any other reason, people with bank accounts can use free services like Venmo, Square Cash, or Zelle to send funds quickly to anyone else with an account.
If you don’t have a bank account, however, these accounts won’t work as intended. You might still be able to access some features, but you obviously can’t transfer to or from a linked bank account.
Instead, most unbanked and underbanked consumers look to paid services to send funds. That could include mailing a money order or cashier’s check or using a transfer service like Western Union or MoneyGram.
Western Union charges based on where you are sending funds. To find out exactly what it would cost, I checked on the cost for transfer within the U.S. where you pay cash in a store. For a $500 transfer, you would pay $15, or 3%. Plus, it takes time to go to the store to drop off the money and set up the transfer. That adds up to a big cost you don’t have to pay when you have a regular bank account.
Many people with bank accounts also have other traditional financial products like credit cards, auto loans, and home loans. But qualifying for a traditional loan may not be possible without a bank account.
Those with a good enough credit can use a credit card in a pinch, which often carries an interest rate of around 10% to 29% depending on your credit history. Personal loans and secured loans may offer lower rates in some cases.
When you have poor credit and don’t have access to traditional banking, common sources of funds during challenging financial periods include payday loans, auto title loans, and pawnshop loans.
Payday loans are particularly worrisome, as they often carry triple-digit interest rates. While 16 states and Washington D.C. now cap interest rates at 36% or less, the average annual percentage rate (APR) for these loans is 391%, according to the Center for Responsible Lending. That means borrowers would pay the principal back multiple times over every year if they continually extend the loan.
Saving money for emergencies and long-term goals
If you don’t have enough money to keep a bank account, you probably don’t have enough for long-term savings. But if you are able to scrape the funds together to put something away for a rainy day, where do you keep it if you don’t have a bank account?
While banks offer security and FDIC insurance, cash-based households may keep extra money around the house, in a vehicle, under a mattress, or buried in a can in the backyard. Really!
There are many problems with stashing cash around your home. The money could be lost or stolen. It could be destroyed in a fire, flood, or other accident. And it doesn’t earn any interest.
Rather than save it, however, many low-income families are forced to spend their money on basic needs like groceries and rent.
Here are some options for the unbanked and underbanked
If you don’t have a bank account or the handy mobile banking app that comes along with it, financial services look very different. Basic tasks like cashing a paycheck or paying for your home utilities are a lot harder, and often more expensive.
Many lower-income households look to payday lenders, check cashing businesses, pawnshops, car title lenders, and other sometimes predatory services to meet their money needs. Instead, it would be better to open a traditional checking account at a bank that helps customers succeed with their money.
Without a bank account, basic financial services like money orders and check cashing could easily add up to $500 in annual expenses where those with a bank account can do these things for free.
Here are examples of no-fee and low-fee banks that are ideal for people opening a checking account for the first time or are returning to banking after a period away:
Chime is an online-only app that offers an excellent checking account with no minimum balance and no recurring fees. Chime includes a wide range of additional features at no added cost. Depositing a check with your phone, paying bills, and other basic financial tasks are easily handled in the Chime mobile app.
There are no overdraft fees, foreign transaction fees, minimum balance fees, service fees, debit card replacement fees, or fees for online transfers to other banks. You can really use this account for free forever in many cases. That makes it a great choice for anyone with a smartphone that wants to handle their money with a safe and trustworthy account at work, home, or on the go.
Novo is a great bank for small businesses looking to avoid common business banking fees. Optimized for independent business owners, entrepreneurs, and freelancers, Novo accounts have no hidden fees and make managing your business finances simple.
The account makes most business needs free including ACH transfers, mailed bill payment checks, mobile check deposits, incoming wires, and ATM visits. Novo even automatically refunds other bank’s ATM fees. If you’re looking for a small business bank with very few fees and no minimum balance requirements, Bank Novo is a good choice.
When you have an account with a high-quality bank, you won’t have to pay any recurring fees and don’t have to worry about minimum balances. You can deposit checks using your phone and send funds to friends and family for free in just a few moments.
Every American should have access to a quality checking account with low fees, but that simply isn’t the case today. By helping more people get access to the U.S. banking system, everyone benefits.