According to the Federal Deposit Insurance Corporation (FDIC), 5.9 million people in the United States were unbanked in 2021. That means they have no checking or savings account through a federally insured institution. Being an unbanked person is more common in lower-income households but also varies widely based on ethnic background. About 8% of African American households that make $30,000 – $50,000 per year are unbanked, 8.4 % of Hispanic households, and 1.7% of White households don’t have a bank account.
The top reasons for being unbanked include not meeting minimum balance requirements, not having the necessary ID such as a social security number and having a general distrust of banks. Not having a simple checking or savings account makes it more difficult to take out loans, manage money and pay bills online securely.
Fortunately, there’s hope on the horizon: the unbanked fintech industry is offering new ways for people who can’t use traditional bank accounts to get access to basic financial tools.
The unbanked are usually people who have had bad experiences with traditional banking. They may have been charged high fees, or had their accounts closed because they couldn’t maintain minimum balance requirements.
One of the most common reasons for being unbanked is that many people don’t have access to documentation like a driver’s license or social security number that banks require as proof of identity to open an account.
These populations may be immigrants, young people who have had trouble navigating the traditional financial system and those who are classified as having a low income.
As the Hispanic population in the United States continues to grow, so does its need for financial services. However, traditional banks require a Social Security number for all banking products.
There are currently 1.5 million Latino-immigrant business owners in the United States and that number is expected to grow as 88% of U.S. population growth is projected to be through immigrants and their descendants through 2065.
Often, one of the biggest barriers to banking in African American communities is a matter of geography. According to a study by McKinsey & Co on contributing factors to the U.S. racial wealth gap there are fewer banks in predominantly African American neighborhoods and more financial institutions that offer check-cashing and payday loan services which can provide much-needed but costly financial solutions, especially for those who lack financial literacy.
Pawn shops are another financial service that unbanked low-income people often find in their neighborhoods and provide loans when emergencies hit. Of course, it is not an ideal option, but these services are often close-by, readily available, and don’t require a credit score or minimum income, making it a convenient option.
Another issue that low-income members of the African American community deal with is income volatility – meaning there are spikes and dips in income that affect the financial health of the household. This volatility can make the necessity to keep a minimum balance and avoid fees a challenge. This can also make the wait for a check to clear with a traditional banking system an unattractive option or one that just can’t be endured when bills are due or purchasing necessities would have to wait as well.
What may be surprising is that almost half of the unbanked in this category have had a bank account in the past. They do not have a lack of awareness of the products available, but they often find charges like overdraft fees expensive and difficult to navigate – which can create mistrust of banks.
The fintech industry can provide an easier on-ramp into the financial world. Fintech companies are helping people without access to traditional banking by offering financial services right in the pockets of many hard-working people through smartphone apps.
Fintech services are making a huge impact on the lives of unbanked populations. CashApp and Paypal, for example, are allowing individuals who cannot access traditional banking accounts to obtain debit cards and manage their finances in a simple way without a checking account. These types of services also cut some of the costs associated with Alternative Banking Services by providing direct deposit services, which cut check-cashing fees and transportation costs.
Additionally, fintech companies that are backed by community banks offer small loans and financing options such as pay-in-four plans that don’t rely on credit scores to determine eligibility.
Apps like Robinhood have democratized investing in the stock market by offering low minimum purchase requirements and easy-to-use interfaces. This has opened up a new pathway to financial growth for those who may have never had access to purchasing stocks before. With the ability to easily buy and sell stocks, people can now take control of their own financial futures and potentially earn higher returns than they would by simply saving cash without interest. This also adds to the ability to trust in the stock market by testing the waters with smaller sums of money.
Other innovative services provided by fintech include crowdfunding for businesses and emergencies and the ability to transfer money instantly – which are all major advantages compared to traditional financial institutions. As more people become familiar with the power of fintech solutions, they’ll be able to achieve greater financial freedom and stability until they transition to the benefits of a traditional account.
The possibilities for these financially underserved communities, thanks to fintech, have fewer limits and barriers to success. With the right approach and continued financial education, unbanked people can make use of these services to build better financial lives for themselves and their families.
First Pryority Bank, member FDIC is proud to support fintech companies that provide services for the unbanked and underbanked. Fintech is a promising industry that can help to provide financial inclusion and through this support, more people who are unbanked or underbanked have affordable services available to meet their financial needs.