What Does It Mean to Be Unbanked?

What Does It Mean to Be Unbanked?

Those who are unbanked do not have deposit accounts at banks or credit unions. That includes checking and savings accounts. Instead, they typically use:

• Cash
• Prepaid cards
• Peer-to-peer payment apps that don't require a bank account
• Money orders

Unbanked vs. Underbanked

The main difference between being unbanked and being underbanked is that underbanked individuals have partial access to banking services. For example, they may have checking and savings accounts but still rely on some alternative financial services. That may include check cashing services, money orders and payday loans.

Why Are People Unbanked?

There are multiple reasons why someone might be unbanked. That can include the following hurdles.

• Opening deposit requirements: Many checking accounts do not have minimum opening deposit requirements, but some do. That can range anywhere from $25 to $100, which can present a hurdle for some people. The minimum amount required to open a savings account depends on the financial institution but can be as much as $500 in some cases.
• Minimum balance requirements: You may need to maintain a minimum daily balance to avoid fees. On a checking account, that could be anywhere from $25 to $100. Savings accounts are different and could require a minimum balance upwards of $1,000 or more. However, some checking and savings accounts do not have minimum balance requirements.
• Lack of access: In-person banking can be difficult if you don't have reliable transportation or have to pay for public transit. Similarly, online banking may not be an option if you have unreliable internet access.
• Lack of necessary documentation: Most banks and credit unions require a valid government-issued photo ID, proof of residency and a Social Security number or Individual Taxpayer Identification Number (ITIN) to open an account. Not everyone has these. Others may assume they need more documentation than is necessary (such as proof of citizenship).
• Negative banking history: Most financial institutions will review a banking-specific ChexSystems report when you apply for a new account. This is a record of past negative bank account activity, such as involuntary account closures, unpaid balances, overdrafts and bounced checks you've had in the past. Previous banking missteps may deter people from opening new accounts, but it's possible to clean up a ChexSystems report.

Downsides of Being Unbanked

Being unbanked can limit your financial stability and make it harder to grow wealth. Here are the main disadvantages to being unbanked:

• Less financial security: A checking account comes with a linked debit card you can use for regular transactions and paying bills. If you lose it, you can simply contact your bank or credit union and request a new one. You can also dispute fraud if someone uses your card without your permission. Cash is a different story. If it's lost or stolen, it's gone.
• Check-cashing fees: You can deposit checks directly into a bank account for free. Without an account, retailers typically charge a flat check-cashing fee that can range from $4 to $8. Check cashing stores may charge as much as 15% in some cases.
• Inconvenience: You'll need to put cash on a prepaid card to shop online or with a merchant that requires a debit or credit card. Even if you use a peer-to-peer payment app that doesn't require a bank account, like Cash App, you'll still need to deposit cash through a participating retailer to load your balance.
• No access to checks or bill pay services: You can't write checks without a checking account. To participate in online bill pay, you'll need a prepaid card that has sufficient funds.
• Difficulty saving for the future: Saving for long-term financial goals can be tricky if you're unbanked. Whether you're setting money aside for a new car or retirement, you'll have to keep a large amount of cash somewhere. High-yield savings accounts allow you to earn interest on your money.
• Makes it harder to build credit: You can establish a good credit score by using credit accounts responsibly and paying your bills on time every month. If you've been unbanked up to this point, a secured credit card or credit-builder loan can be good places to start. If you want to apply for a mortgage or auto loan in the future, you'll need adequate credit.

Benefits of Being Banked

Keeping your money in a bank account is the most secure option. Here are some of the biggest advantages of being banked:

• Cost efficiency: You can expect fees when using check-cashing services or adding cash to a prepaid card. It can also be easy to get stuck in a high-interest debt cycle if you don't have a savings account to cover emergencies.
• Access to modern tools: With a bank account, you can enjoy direct deposit and put certain bills on autopay. Most banks also have mobile apps that allow you to cash checks from anywhere.
• Greater security: At most banks and credit unions, funds are insured for up to $250,000 per depositor, financial institution and ownership category.
• Wealth accumulation: Savings accounts earn interest and can help grow your money over time, especially if you opt for a high-yield savings account. Investing is also a core part of saving for retirement.

How to Open a Bank Account

You can use a checking account for regular spending and a savings account to build your emergency fund and save for short-term goals. Here's a step-by-step guide to opening your first bank account.

1. Research Financial Institutions

Every financial institution is different. Start by comparing online banks, traditional banks and credit unions, looking specifically at:

• Opening deposit requirements
• Minimum balance requirements
• Fees
• Interest rates on savings accounts (also known as annual percentage yields, or APYs)
• ATM access
• Physical locations (if you prefer to do your banking in person)
• Customer service reviews

2. Organize the Necessary Documents

Once you've chosen where you want to do your banking, check to see what documents they require to open an account. That will likely include the following:

• Valid government-issued photo ID
• Birth date
• Social Security number or Individual Taxpayer Identification Number
• Proof of U.S. citizenship or residency
• An initial deposit

3. Apply and Fund Your Account

Many financial institutions allow you to apply online. Once you're approved, you can fund your account by visiting a local branch to deposit cash or by using a prepaid card. Some bank accounts may require a minimum opening deposit, but many don't.

Programs That Help the Unbanked

The following programs support those who are unbanked or underbanked. Connecting with them can help you build a strong financial foundation.

Bank On

The Bank On program connects community groups and government agencies with financial institutions that provide unbanked and underbanked people with secure, reliable bank accounts. These accounts have no overdraft fees and low (or no) monthly fees. Some Bank On accounts have no minimum opening deposit requirement, making it more affordable to get started. Meanwhile, the account holder gets all the benefits of a fully functioning bank account.

ACCESS Initiative

The Access Initiative (Advancing Communities through Credit, Education, Stability and Support) is designed to promote financial inclusion and support the unbanked and underbanked community. It's managed by the National Credit Union Administration (NCUA) with the goal of expanding access to affordable credit union services. That includes access to credit and savings. NCUA offers free financial education resources for credit unions to share with their members.

Frequently Asked Questions

The Bottom Line

Even if you've been unbanked or underbanked for a while, it's never too late to open a bank account. It can provide a safe place to hold your money—and make it easier to manage your finances and reach your short- and long-term goals. That includes retirement.

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