According to a report by the FDIC, approximately 5.9 million U.S. households were “unbanked” in 2021, meaning no one in the household had a checking or savings account at a bank or credit union. Another 18.7 million households were “underbanked,” meaning the household had a bank account, but used at least one nonbank service or product in the past 12 months. And communities of color are among the highest shares of unbanked and underbanked people, with lower rates of bank account ownership occurring within Black and Latinx communities (12%), compared with their white counterparts (3%).
Unbanked individuals have no way to conduct financial transactions beyond cash, leaving them vulnerable to fraud and facing costly alternatives, such as relying on check-cashing stores and payday loans with higher rates than traditional financial services. These high rates can make it harder for unbanked and underbanked communities to save money or even cover expenses.
The Financial Health Network reported that, in 2018, unbanked and underbanked Americans spent $189 billion in fees and interest on financial products. This averages out to $3,000 in annual costs per person. These additional costs make it difficult for unbanked and underbanked people to build wealth and drive cyclical poverty.
Some banks identify the underbanked as a separate market segment, according to the Office of the Comptroller of the Currency (OCC), while others treat them as part of an existing market segment. However, underbanked communities present a significant opportunity for financial institutions. After all, once someone signs up for a bank account, they are significantly more likely to use other banking services.
Significant consequences can impact both underbanked communities and financial institutions if they fail to prioritize proactive engagement.
Banks provide a secure way for individuals to manage their money, which creates opportunities to build wealth and credit through products like high-yield savings accounts or loans. Without an established credit history, underbanked individuals cannot buy a home or overcome generational wealth disparities. Underbanking also makes it difficult to build an emergency fund — according to Bankrate, 22% of U.S. adults have no emergency savings, and 57% said they are uncomfortable with the amount of savings they have. Should an emergency occur, underbanked individuals may have no way to get the funds they need.
Additionally, financial institutions are at risk of falling behind evolving regulatory demands. Recent updates to the Community Reinvestment Act (CRA) ensure it remains relevant in today's increasingly digital banking landscape by placing greater emphasis on driving impact in underserved communities. These updates expand the types of activities that qualify for CRA consideration from the previous rule’s four categories to 11, including essential community infrastructure, disaster preparedness, financial literacy, and many more. Regulators have also added new provisions to address the legacy of redlining and other discriminatory practices, including special-purpose credit programs aimed at increasing credit access for historically disadvantaged individuals and communities. Large banks will also be required to disclose more existing data available under the Home Mortgage Disclosure Act.
Given these regulatory changes, banks have a unique opportunity to proactively engage largely untapped markets and better support underserved communities.
With wealth inequality rampant in the U.S., financial institutions have a vested interest in growing their customer base. According to the Federal Reserve, the top 10% of U.S. households held 69% of total wealth through the second quarter of 2023, compared to the 2.5% held by the bottom 50% of households.
By centering financial equity, financial institutions can provide underbanked communities, and neighborhoods with disproportionately low credit scores, access to financial resources including credit and loans allowing more individuals to build wealth. Emphasizing financial literacy can also bridge the equity gap. One study found that less than one-third of Black respondents answered more than half of personal finance questions correctly, compared to 68% of white respondents.
Here are four proven tactics to help financial leaders as they navigate the nuances of underbanked communities:
One of the biggest barriers to banking in underserved communities is distrust in the financial system. Black and Brown communities tend to be cash-based, and stories of banks shutting down often do nothing to assuage concerns that their money could be lost through no fault of their own.
Financial institutions, then, must find a way to combat that lack of trust. Ichor helps companies engage community members to identify their needs and pain points. Whether through one-on-one or small-group active listening, companies can leverage those insights to help build trust.
Another barrier to banking in underserved communities is a lack of education or awareness of the financial system. Targeted outreach and financial literacy programs can help individuals make informed decisions and build awareness of the benefits of having a checking account versus costly, non-banking alternatives.
Ichor identifies prospective community organizations to partner with companies in providing financial education. Strengthening neighborhood ties creates greater opportunities for financial inclusion.
According to the Pew Research Center, 85% of Americans have a smartphone. Not only that, but the FDIC report found that the use of mobile banking jumped to 43.5% in 2021. This presents a unique opportunity for financial institutions to reach underbanked communities via mobile means. Mobile-based fintech companies enable more people to open bank accounts or access other financial services. Ichor’s data analysis and market prioritization help banks adapt their digital engagement and marketing efforts to reach potential new customers.
Minimum deposit requirements present a barrier to banking for underserved communities. Monthly and overdraft fees are an additional challenge for low-income individuals. One way to better engage unbanked and underbanked communities is with increased transparency surrounding costs and offering affordable products, such as no-fee accounts and lower opening deposits.
Bringing underbanked and unbanked communities into the mainstream financial system requires a combination of meeting individuals where they are and creating unique solutions to mitigate the challenges they face. By creating a pathway to financial inclusion, building wealth is possible for all communities.