Unbanked

Unbanked is an informal title for adults who have yet to use traditional banking services, like personal checks or credit cards. These individuals also need savings or checking accounts for depositing, withdrawing, or transferring money. 

There are millions of adults in the world who don't have access to basic banking facilities. However, this category uses cash, prepaid debit cards, money orders, payday lending, check cashing, etc., as banking alternatives. While most of such a population belongs to emerging economies, a handful of unbanked adults live in substandard areas of developed nations.

Unbanked is a name given to those groups of legal-age individuals who have yet to avail of any banking services, nor do they have any bank accounts with the Federal Deposit Insurance Corporation (FDIC) certified financial institutions. Such people are deprived of the various online and offline traditional banking facilities like deposits, withdrawals, savings, fund transfers, etc. On the contrary, they make all their transactions in cash and make use of prepaid debit cards or money orders. Also, they have to depend upon payday loans or check cashing.

Staying away from traditional banks adversely affects these people since they have to pay more for paying bills or cashing checks. Indeed, they need help to avail of such financial services and may have to wait long for even a simple payment. Moreover, keeping cash increases their risk of loss and theft. Also, such financial exclusions can lead to slow economic growth when most people need banking access.

In the 21st century, financial inclusion is essential for an economy's overall growth. Therefore, the government and financial institutions are constantly making efforts to convert this population into banking customers. Since the banking system emerged in the late 1700s, governments around the world have engaged in increasing financial awareness of establishing strong banking and finance sectors.

Even today, a large section of the world population is deprived of banking services due to the following reasons:

• Low or Unsteady Income: Individuals with low incomes or who cannot generate steady earnings, like people in seasonal occupations, cannot afford to open and maintain bank accounts. 
• Little Trust or Confidence: Many adults have low confidence in the banking system and don't trust these organizations with their hard-earned money.
• Poor Access To Banking Services: Many people live in remote or village areas where they do not have proper access to traditional banking services, which forces them to rely upon alternative financial services.
• Illiteracy or Lingual Barriers: The less educated or those who don't speak the major languages face challenges with getting a bank account or using such services.
• Privacy Concerns: Some people are insecure about sharing their details with financial institutions.
• High Banking Fees or Other Basic Requirements: Banks impose various charges, such as account opening fees or minimum balance requirements, that prevent people from having bank accounts.
• No Credentials: Sometimes, individuals don't even have basic documents like a social security number to open an account.
• Ethnic Minority Groups: The individuals belonging to the ethnic minority communities.

Let us consider the following examples to understand the life of such people and the difference that their financial inclusion can bring to the overall society:

Example #1

Suppose Mr. Campbell and his family live in the outer skirts of Georgia. They make their living through farming and belong to the low-income group. Although there are 4 adults in the family, including Mr. And Mrs. Campbell and their two children, no one has a savings or checking account with any certified financial institution. Moreover, the whole family buys the goods and services and sells the crops in cash. Also, they use money orders as their secondary primary mode of financial transactions, while Mr. Campbell relied upon payday loans for emergency funds. In this case, the Campbell family is considered unbanked.

Example #2

An article published on February 14, 2024, highlights the financial hardships faced by many Indonesians, especially in remote areas. The nation has a population of more than 273 million spread across 17,000+ islands; nearly 49% of adults were unbanked or underbanked in 2014, as reported by the World Bank. Since around 62.555% of the bank branches and ATMs are located in Java, the other regions are deprived of banking access.

Therefore, the Indonesian government is promoting fintech solutions like digital wallets to boost financial inclusion among the Indonesian unbanked population. These digital wallets facilitate easier transactions through smartphones, conveniently reaching people in remote areas. Indeed, a 2021 survey conducted by the National Board for Financial Inclusion indicated that digital wallets have been accepted as a significant mode of financial transactions and service accessibility.

Digital wallets have significantly reduced the cost of cash handling and the chances of errors in the calculation for micro, small, and medium enterprises (MSMEs). However, for significant economic growth, Indonesia thrives on progressive digital wallet policies and regulations. As the country approaches its 100th independence anniversary, leaders aim to position Indonesia among the world's top five economies, using digital wallets to enhance financial inclusion and economic development.

In the realm of the digital era, the major challenge for the government is banking this population to ensure greater financial inclusion. Therefore, the government, together with the financial institutions, undertake the following strategies for this purpose:

1. The government should run campaigns and programs to encourage unbanked people to have a bank account.
2. It is equally essential to make banking more affordable and accessible for these individuals by facilitating zero-balance accounts, no-cost accounts, and minimum balance requirements.
3. We are offering multilingual support and assistance to people who need to speak English or other major languages. The staff should also be well-trained to serve the requirements and resolve issues of individuals belonging to diverse cultural backgrounds.
4. Credit-building programs, such as credit-builder loans, secured credit cards, and credit counseling services, can motivate the unbanked to have higher credit scores and better credit histories.
5. The banks should collaborate with local government bodies, non-profit entities, and other community organizations to find and connect with people who need to be using the banking facilities.
6. Banks can partner with business entities to ensure the financial inclusion of their employees by requiring them to open salary savings accounts.
7. Banks can reach the mass unbanked or underbanked through financial education programs, which can make them literate about basic banking needs, ethical banking practices, budgeting, savings, credit, etc.
8. The banks can have pop-up branches or mobile banking units to provide services even in remote areas where traditional banks are unavailable.
9. The banks can give microfinance and small-dollar loan options to those who don't qualify to receive traditional credit from the banks.
10. Convenient banking facilities like mobile banking and other digital financial services may allure unbanked and underbanked individuals.