Unbanked States of America: Life Outside the Financial System

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Being part of the American financial system hasn’t always been easy, but in more recent years, the number of unbanked citizens—those living without a checking or savings account or credit union—has been slowly but surely declining.

In a report of the results of the Federal Deposit Insurance Corporation (FDIC), about 5.4% of American households were unbanked in 2020. That adds up to more than 7.1 million households.

Although during the release of these figures, the COVID-19 pandemic severely restricted movement, leaving many people stranded at home with minimal access to basic financial services.

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However, in more recent times, now that the pandemic has subsided somewhat, a sizeable portion of Americans are still considered unbanked or unbanked.

A current look at conditions has revealed that more than 14.1 million American adults are unbanked, according to a more recent study. National Survey of Unbanked and Underbanked Households. This represents about 6% of the US adult population.

The allure of the US banking and financial services sector has been slowly fading as many more people are losing confidence in some of the country’s top banks.

A report by LexisNexis highlighted several important and troubling issues surrounding America’s unbanked population. For the many without credit, checking or savings accounts, a lack of transparency, support and knowledge has prevented them in recent years from becoming a fully fledged bank.

Issues related to cybersecurity threats, online fraud, inclusion initiatives, money laundering, and regulatory compliance are just a few of the many challenges facing banks.

On the other side of the spectrum, banks are also seeing a number of ongoing issues that prevent them from accessing the information of the unbanked. Some 69% of respondents to the same survey revealed that contacting or connecting with unbanked and underbanked people is the hardest part of the onboarding process.

The financial ecosystem, which includes a variety of businesses, both public and private, has become, in the minds of the unbanked, synonymous with large corporations and lack of transparency.

Although this is not the case in most cases, life outside the American financial system is only looking to become more challenging and even more difficult.

Without proper documentation and social security information, the millions of unbanked Americans will only be pushed over the edge in the years to come as regulations change and the financial services industry becomes increasingly digital.

Who are the unbanked Americans?

Looking at the same data provided by the National Survey of Unbanked and Underbanked Households, the demographics of the unbanked are as follows.

About 16.9% of black households and 14% of Hispanics are unbanked, figures that make these minority groups five times more likely to be unbanked than their white counterparts.

most of unbanked individuals they are those in low-income households and fall into the low-income brackets. About 19% of households with an annual income of $30,000 or less are classified as unbanked, compared to 2.4% of households earning more than $30,000 a year.

Additionally, unbanked Americans who have a bank account but obtained alternative non-bank services in the past 12 months account for just under 50 million adults.

The challenge here is that uncertain economic conditions and changing business cycles have prevented low-income households and individuals from banking in the near future.

Higher interest rates, skyrocketing inflation, and expensive bank fees only add more barriers.

The lack of affordable financial services, the fact that they are too expensive or even out of reach has led many of the unbanked and underbanked American population to seek alternative means of helping them with financial tasks and services. basics.

While there are workarounds available, they are not said to make it any easier for those without access to banking services. Although it is possible that personal installment loans allows people to borrow more money compared to other short-term personal loan options, still comes with a level of financial security many unbanked Americans may not have. As a result, many adults who do not have access to the right financial products or services will also find their risk increased. amid recessionary conditions.

carrying the loads

For the millions of unbanked or underbanked Americans, life outside the financial system looks very different compared to their banked counterparts.

In a report from US Postal Service, it was found that underserved members, who have limited access to financial services, are paying more in interest and fees related to banks. The report found that, on average, unbanked families use about 9.5% of their annual income to pay fees.

On average, these underserved households pay about $2,412 a year in interest and fees, and consumers with checking accounts pay an average of $100 a year in overdraft and non-sufficient funds fees.

Unbanked adults are also victims of payday lenders who offer quick loans with interest rates of up to 500% according to most. recent data. To put this in perspective, an average credit card may charge the borrower an Annual Percentage Rate (APR) of 28 to 36%. Payday loan providers have an APR of 398% on average.

Being underbanked not only makes financial stability more difficult, it’s also becoming increasingly costly to manage this type of lifestyle.

Those whose banking needs have yet to be met are also struggling to save for major events, purchases and other emergencies.

Some reports have revealed that unbanked adults have a savings rate of 17.4%, compared to 56.3% of the unbanked and 61.6% of fully banked individuals.

The low rate of emergency savings, or even the lack of an emergency fund, makes it difficult for many people to prepare financially for any unforeseen expenses.

Additionally, the Federal Reserve found that about 36% of Americans don’t have enough money to cover an emergency expense of just $400. On average, 78% of Americans have an emergency savings account, and 51% have $5,000 or less in savings. Only 35% have $1,000 or less available in their savings account at the time of observation.

The lack of savings and financial security not only affects the unbanked, but also creates hardship for the majority of bank residents in the United States.

Having little or no savings in the midst of a changing economic cycle has left many Americans fearful about whether they will be able to survive a sudden economic downturn. During a time of furloughs, layoffs, business closures, and furloughs, many of which we experienced during the pandemic; Being prepared is one of the most crucial aspects for both banked and unbanked Americans.

Lack of access to credit and credit cards is also another major burden borne by underrepresented communities. Without proper information and social security, people will find it difficult and ultimately impossible to borrow money or establish a credit score.

Although there are alternative solutions available in the market, reasonable interest rates make it extremely expensive for people to obtain larger loans.

Although the lack of credit and access to it prevents many from improving their wealth, there are a handful of unbanked households (7.2%) that still have credit through a credit card, a more frequented access route for the creation of credit.

Credit in some areas of the financial system can provide greater access to a range of different products and services that can help people become more financially independent in building their wealth.

address problems

Although it is not as simple as one might think, having to search for the unbanked people spread across the country, the best possible solution would be for both banks and government institutions to combine their efforts to include underrepresented communities within the system. financial.

Even these collaborative efforts can still pose many challenges, and while there are many hurdles, in the coming year banks may further reduce the rate of unbanked residents.

Before this can happen, financial institutions, along with help from the government and other private entities, will need to resolve internal issues related to transparency, data capture, and digital security. As we have seen, most of the unbanked in America remain blatantly anonymous due to a lack of transparency between financial institutions and the general public.

The bottom line is that, sooner or later, the unbanked and the underbanked will need to make a financially viable decision. High costs and fees, exorbitant interest rates and lack of savings are not helping them break free from the financial system, they are only pushing them into the abyss of poverty.

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