Underbanked

Underbanked refers to individuals and entities who have a bank account but have limited access to better banking services and facilities. Such individuals are often seen as dependent on costly financial services like cash lending, money orders, check cashing, and money transfer services.

According to the Federal Deposit Insurance Corporation (FDIC), underbanked people maintain a checking or savings account but do not benefit from the wide range of services offered to them or applicable to their account. Although it takes time, banks and financial institutions encourage their customers to fully acknowledge and utilize the services as it can lift financial pressure from themselves.

Underbanked refers to a population of bank account holders who limit their usage of banking services to alternative banking services. They do not indulge, take advantage of, or explore the full banking services and facilities offered by banks or financial institutions. Every typical bank offers a bank account service, but in modern-day banking, banks have designed and introduced a series of banking services that come with the bank account. 

The underbanked population mainly comprises people belonging to minorities, ethnic or racial groups. Another evident characteristic of them is that they have low income, less education, and do not intend to interact with banks above a certain level of services because they have less access to credit. Federal authorities like FDIC or the Federal Reserve Board (FRB) point out that households with volatile income tend to remain underbanked. 

Such a customer has limited use of their bank accounts. When using banking services, they opt for alternatives such as money orders, prepaid debit cards, short-term loans, and check cashing. The reason for this goes beyond income level and accessibility. It lies in the psychological mindset of individuals who generally avoid using banks for financial services. They prefer traditional methods, even if it means paying extra charges and investing more time and effort.

The main reasons are listed below: 

• Lack of income - It is one of the crucial reasons many individuals remain underbanked; they do not have the funds or need to indulge in better banking options. 
• Lack of knowledge - Many individuals who do have a bank account do not have the knowledge or information about modern banking services that are available and offered to them. 
• Past experience - Bank customers may have had a bad experience using a different banking service than their regular facilities and not like it. 
• Privacy - People like to maintain their privacy and financial information and hence do not opt for a wide range of services and keep precise and limited use of banking services. 
• Trust issues - Although it may sound awkward, people still do not trust banks and like to have a constant hold of their money. It is also one of the reasons people like to remain unbanked. 
• Lack of paperwork - A lot of modern banking facilities demand customers to produce credentials and important documents before allowing them to use the services; not everyone has them with them. 
• Limited access to technology - People belonging to rural areas and small households do not have the technological means to use modern banking facilities and solutions. 
• Absence of need - Lastly, a percentage of the population has limited funds and means of receiving money, so it doesn't make sense for them to use such services. However, banks should encourage every customer to utilize their services. 

Below are two distinct examples to help you understand the concept better: 

Example #1

Suppose Howard runs a small grocery store that was started by his father two decades ago. Howard's store has a huge customer base and daily footfall. Every day, Howard does business for thousands of dollars. He only maintains a savings account and makes weekly deposits in the local bank. Though Howard has a reasonable income, he never indulges in facilities like credit cards, digital banking, mobile applications, loans, and other facilities that come with his bank account. 

Every time Howard wants to buy something, he pays through cash and is never interested in taking short-term loans or paying through credit cards. This is a simple example. Howard does have a simple savings account, but apart from the general deposits and withdrawals, he opts to remain like that. In the real world, banks encourage their customers to use more and more banking services.

Example #2

In November 2023, Suits Me and Jumio collaborated to help the underbanked individuals in the UK apply for an account in minutes without traditional banking document requirements. Suits Me is known for being the first in the UK to enable account opening without a photo ID or address proof. 

The director of Suits Me expressed his views that this collaboration will help people who struggle with documentation. Now, they don't have to incur travel costs to visit bank branches and apply for bank accounts in minutes. On the other hand, Jumio is utilizing artificial intelligence, machine learning, biometrics, and liveness detection to support the rapid conversion of customers. 

The main differences between these two categories are listed below: