Issue #231: Why some people don’t have bank accounts

Hi y’all —

My birthday is next month! I’m turning 32, and that means my checking account is turning 15.

I got my first bank account — the one linked to my panda debit card, may it rest in peace — at my hometown Bank of America when I was in high school. Since then, I’ve opened two savings accounts (one with BofA, one with Ally) and three credit cards (a BankAmericard, an American Express Blue Cash Preferred and a Chase Sapphire Preferred). I’ve come a long way financially in the last decade and a half; at this point, I’m very plugged into the banking system.

At the same time, I'm aware that not everyone has the same privileges and opportunities I do. There’s a large chunk of the U.S. population that doesn’t have a bank account at all.

Let's learn more. Why are some people unbanked? Why is that an issue?

Katie Fitzpatrick, an associate professor of consumer science at the University of Wisconsin-Madison, started by giving me two definitions.

The term “unbanked,” she says, generally means that nobody in a given household has a savings or checking account at a bank or credit union. The term “underbanked” means someone has a bank account but typically uses non-bank financial services (more on this in a minute).

Both are common. The biggest and most authoritative source of information on unbanked and underbanked folks in the U.S. comes from the Federal Deposit Insurance Corporation, or FDIC. Its latest report, published last summer, found that 4.5% of American households are unbanked, which shakes out to nearly 6 million families. Another 14.1%, or 18.7 million households, were underbanked.

Although there’s a “myriad of reasons” that explain why, Fitzpatrick says, they generally fall into one of three categories. There are customer service reasons, economic reasons and financial management reasons.

The first category, customer service reasons, is self-explanatory: The offerings simply don’t match what the customer needs. Maybe a person is unbanked because there aren’t convenient branch locations near them, for instance, or they don’t have transportation that can take them there. They might not be able to access banking services in their language.

They also, crucially, may not trust banks, so they don’t want to store their money in them.

As for economic reasons, many banks and credit unions force customers to meet minimum balance requirements, meaning they must keep a baseline amount of money in their checking/savings account at all times or be charged a fee. That’s a big ask for someone who may be living paycheck to paycheck.

In fact, “don't have enough money to meet minimum balance requirements” was the No. 1 most-cited reason in the FDIC survey as to why respondents were unbanked.

Finally, others may be unbanked because they lack certain financial skills: “People may not think they can manage or balance a bank account,” Fitzgerald adds.

Being un- or underbanked can pose several challenges, according to Carla Sanchez-Adams, a senior attorney at the National Consumer Law Center who’s an expert in banking and payment systems.

“Historically, getting and having a bank account was your first foot in the door to the U.S. financial system,” she says. “If you had an account at a Chase, a Wells Fargo, whoever … they would extend offers of credit to you, and that’s how you would get credit, and you would build your credit history and be able to get access to more financial services.”

Without that record, it’s much harder to move forward in the system… or even accomplish many everyday tasks like paying bills.

In many cases, people who are unbanked end up relying on alternative financial services to bridge the gap. This can be expensive — check-cashing services and payday lenders charge exorbitant premiums, which can further the cycle of debt and leave already-disadvantaged people financially worse off than before.

That’s in addition to the fact that these providers are often not supervised or regulated, so they can get away with having lax data and fraud protections.

As a very basic example, someone with a Bank of America checking account is protected by the FDIC and will get their money back if it goes under. Someone who is unbanked and uses a payment app as a quote-unquote “bank account” may not be.