What does it mean to be unbanked? Understanding rural banking access challenges

Most Americans take banking for granted. It’s a routine part of their everyday lives. However, millions of Americans are left outside of the banking system. This can be a continual drag on their finances.

An FDIC survey found that 5.6 million Americans are unbanked. Another 19 million are what the FDIC describes as underbanked. With so many Americans affected by limited access to banking, it’s important to recognize how this can hold them back financially, and what they can do about it.

What does it mean to be unbanked?

According to the FDIC, being unbanked is when someone doesn’t have a bank account, and neither does anyone else in their household. Specifically, this means they don’t have a savings or checking account with a bank or credit union.

A related problem is being underbanked. This means the household has a bank account, but that account has not been able to meet all their financial needs. The FDIC measures this by counting how many households have had to use other financial services such as nonbank money orders, check-cashing services or payday loans.

The role of banking services in household finances

People with full access to banking may not notice how big a role it plays in their day-to-day financial management. Paychecks are directly deposited. Bills are handled efficiently with checks or electronic payments. Savings are accumulated safely and earn interest. Credit is easily accessed through a banking relationship or a wide range of other options.

If you took away all those services, these routine tasks would suddenly become more difficult. In many cases, they’d also become more expensive.

Unbanked vs. underbanked

The FDIC’s definition of underbanked captures the fact that even people who may have a bank account don’t always find that it can meet all their needs. So, they find themselves getting at least some of their financial services from providers other than banks or credit unions. These providers are generally less regulated and often more expensive.

Disadvantages of being unbanked or underbanked

Being unbanked or underbanked can have both short-term and long-term disadvantages.

Daily financial challenges

In the near-term, not having access to a full range of banking services is an inconvenience and often an extra expense.

It can mean having to physically visit a check-cashing service every time you receive a check, whether from an employer, government agency or other source.

Not having access to a transaction account often results in having to keep cash on hand. This represents a security risk both at home and when going out. It can also make it difficult to attend the growing number of cash-free events at festivals and arenas.

Not having adequate access to banking also makes payments more difficult. Unbanked and underbanked households often have to use alternatives such as money orders and prepaid cards, which often involve significant fees.

Long-term financial consequences

Long-term, being unbanked or underbanked can impede wealth building.

Not being able to easily deposit money can make it more difficult to accumulate savings. It may also rob people of the opportunity to earn interest on their savings.

Besides making it more difficult to accumulate money for retirement and other long-term goals, not having savings makes households more vulnerable to financial emergencies. Whether it’s an unexpected repair or a temporary job loss, the lack of an emergency fund makes people more likely to have to borrow to see themselves through a crisis.

The interest paid when you borrow adds to the cost of a financial setback. This is especially true when people have to fall back on unconventional sources of credit such as payday lenders, cash advance loans or auto title loans.

Lack of access to conventional sources of credit can also prevent households from making bigger-ticket purchases, such as a car or a house. Not having a reliable vehicle can limit employment opportunities as well as access to essential goods and services. Not being able to get a mortgage can shut people out of the tremendous wealth-building opportunity of buying a home.

Besides preventing unbanked people from using conventional credit, not having a credit record can deny them key opportunities. Increasing numbers of employers and landlords are checking the credit records of applicants. So, not having credit can affect where you’re able to live and work.

Who are the unbanked?

So, which Americans are most likely to be victimized by a lack of access to banking services? The FDIC report found that households with one or more of the following characteristics are more likely to be unbanked:

• Lower income
• Incomes that vary greatly from month to month
• Less education
• Single parent
• Black, Hispanic, Native American or Alaska Native
• Working age with a disability

In addition, a Federal Reserve survey found that young adults and those living outside of metropolitan areas are more likely to be unbanked.

In some cases, not using a bank is a choice. “Don’t trust banks” was the second most frequently cited reason unbanked people gave for not having a bank account. The desire for more privacy was a related reason people also gave. While people are entitled to make this choice, less access to financial literacy education may play a role.

In other cases, being unbanked may be less a choice than a consequence of geographic or economic circumstances.

Geographic barriers to traditional banking

Banking is more readily available in some areas of the country than others. This has led to what are known as banking deserts, where there are no banking options nearby.

Naturally, rural areas can be banking deserts. Where populations are more widespread geographically, there may be no local bank branch close at hand. As a result, annual Federal Reserve studies have persistently found that people in metropolitan areas are more likely to have bank accounts than those outside of those areas.

However, even people in cities don’t always have equal access to physical bank locations. Banking deserts can also occur in poor sections of cities, where banks are less likely to put branches.

To a large extent, online banking has helped break down some of these geographic barriers. However, some of the same characteristics that make people more likely to be unbanked also make them less likely to have access to broadband internet.

The Census Bureau found that households in rural areas, those with lower incomes, people with disabilities and members of ethnic or racial minorities were all less likely to have broadband access.

Some of this problem is geographic. For example, internet access is less common in rural areas, especially in the Western part of the United States where populations are more spread out. So, internet access can’t solve all the problems of rural banking.

Economic factors contributing to unbanked status

Even in more densely populated areas, there can be economic factors limiting access to banking.

The FDIC survey found that nearly half (46.6%) of unbanked people who were interested in opening account said one reason they didn’t was because they couldn’t meet minimum account requirements.

Another commonly cited reason people said they were unbanked was that fees were too high. Bank fees are particularly hard on smaller accounts because the dollar amounts of those fees represent a higher percentage of lower balances.

Solutions for unbanked populations

Unbanked and underbanked people often face geographic and/or economic barriers to having a bank account. So what’s the solution?

As is often the case, the solution to a complex problem may not be any one thing, but a combination of things.

Technology tools

Online banking has done a lot to break down both geographic and economic barriers.

In terms of geographic barriers, online banking has greatly expanded the choices available throughout the country. Not only are more choices now available to areas where physical branches are scarce, but in many cases, best-in-class options can be accessed.

Online banking is more cost-effective than maintaining a network of physical branches. As a result, banks are often able to offer more favorable financial terms for online banking. For example, the most recent MoneyRates Best of Banking survey found online checking accounts with no monthly fees, and little or no minimum balance requirements. That should make them affordable even to low-income customers.

Of course, online banking requires internet access. Not having that access may remain a barrier to some people, though accounts are widely accessible via phone apps. The unbanked population has shrunk considerably as smartphone use has become almost universal. In 2011, 8.2% of American households were unbanked. By 2023, that percentage had dropped almost in half, to 4.2%.

Credit unions and community banks

There are a handful of huge banks that are household names. These banks have the largest bank networks and also advertise heavily.

As prominent as these banks are, they’re only the tip of the iceberg. There are more than 4,000 FDIC-member banks, and a similar number of federally insured credit unions.

If no national bank has a branch nearby, you may find a regional or community bank nearby, or a credit union. Even if you don’t live in a banking desert, you may find these institutions add to the local choices available. More choice is often an opportunity to find better financial terms.

Fintech banking alternatives

Beyond banks and credit unions, there are also several new types of institutions that offer some form of banking services. These are called fintech companies, or neobanks.

Companies like Dave, Stash, and Acorns offer services that can help consumers save money or make payments. Institutions that aren’t banks or credit unions do not directly offer federal deposit insurance. Some may offer it indirectly, though there can be flaws in that type of coverage. Even so, these alternatives add to the choices available to consumers.

Getting the banking services you deserve

Modern banking options have helped reduce the percentage of Americans who don’t have a bank account. If you’ve felt shut out of the banking system in the past, it might be worth a fresh look.

It’s always a good idea to compare different banking options to see which features and fee structures align best with your needs. Taking the time to shop around can help you find a partner that makes managing your money much easier.

Frequently-asked questions