Welcome to the new millennium, complete with its myriad of acronyms and terminology. We’re constantly climbing a steep learning curve, yet, for matters of inclusion and exclusion, it’s essential to grasp the concept of the “underbanked” to effectively tackle financial inclusion. It’s the perplexing reality for those with bank accounts who have restricted access to comprehensive banking services, because of their credit score. In turn, this forces them to use credit alternatives that are more costly. We’ll examine who the underbanked are, the obstacles they face, and discuss meaningful solutions to bridge the financial gap. This is a part of our series to define and explain the ever evolving Fintech market which is making it easier to live a better life.

Key Takeaways

  • The term ‘underbanked’ refers to individuals who have bank accounts but still rely on alternative financial services due to inadequate access to traditional financial tools like credit cards, loans, and insurance. About 15% of the Canadian population are facing this issue with 16% of adults in the US being underbanked.
  • Demographic factors such as low income, lack of education, disability, and family structure significantly contribute to the likelihood of being underbanked, necessitating targeted solutions to address financial exclusion within these groups.
  • Initiatives to help underbanked individuals include second chance and low-fee bank accounts, specialized banking departments, digital banks & neobanks, and the use of fintech for automation of savings and budgeting, but these require reliable internet access and the inclusion of all demographics to be effective.

Defining Underbanked

The term ‘underbanked’ is used to describe families and individuals who have checking or savings accounts but still depend on alternative financial services like money orders, check-cashing, and payday loans. These alternative services are often used in addition to traditional banking. Households are considered underbanked when they have a bank account but do not have adequate access to traditional financial services. This means they have limited access to the financial tools that many of us consider basic necessities, such as credit cards, loans, and insurance.

One might wonder why someone with a bank account would choose to use these alternative services. The answer lies in the unique challenges faced by underbanked households – high fees, minimum balance requirements, and location constraints, to name a few. These obstacles often push the underbanked towards alternative financial services to meet their banking needs.

In Canada, this is not an isolated issue. Approximately 15% of the population, or close to five million Canadians, are underbanked. That’s a significant proportion of people who are not fully benefiting from the security, convenience, and financial opportunities offered by the mainstream schedule A banking system. In the United States, that equates to more than 50 million people. The odds are that you personally know people who are underbanked.

Underbanked vs. Unbanked

Now, you may be wondering how the underbanked differ from the unbanked. While both groups face challenges in accessing traditional financial services, there are key differences in their financial behaviors and needs. Unbanked individuals do not have a bank account and entirely manage their finances in cash, while underbanked individuals do possess a bank account but often resort to alternative financial services due to limited access to more suitable banking options.

One of the main barriers for unbanked individuals is a lack of trust in financial institutions. Approximately 33% of unbanked consumers report not trusting banks, often due to negative past experiences. This significant trust gap influences their decision to stay away from traditional financial services and opt for alternative solutions.

However, the use of alternative financial products often comes with its own set of challenges. For instance, the use of prepaid cards by unbanked individuals incurs additional fees and fails to contribute toward building a credit history, which is critical for obtaining loans and other services in the future. This underlines the urgent need for affordable and trustworthy banking options for both the unbanked and underbanked populations.

The Underbanked Landscape

Understanding the underbanked issue requires a landscape view. We’ve already established that around 15% of Canadians are underbanked. However, this issue isn’t evenly distributed among the population. Certain demographics are disproportionately affected by underbanking, due to a variety of socio-economic factors. Some of these demographics include:

  • Low-income individuals and families
  • Immigrants and refugees
  • Indigenous communities
  • Rural and remote communities
  • Youth and students

By understanding the specific challenges faced by these demographics, we can work towards developing targeted solutions to address the underbanked issue.

The underbanking issue is closely intertwined with:

  • Income
  • Education level
  • Disability status
  • Family structure

The interplay of these factors adds layers of complexity to the underbanked issue, making it a multifaceted problem that requires a comprehensive solution.

Demographic Breakdown

Diving deeper into the demographic breakdown, it’s clear that being underbanked is not just a matter of personal choice or financial mismanagement. It’s a systemic issue deeply rooted in socio-economic disparities. Households with an annual income below $15,000 have the highest percentages of being underbanked, standing at 19.2%. This statistic underscores the dire need for affordable banking services for low-income households.

Education also plays a significant role in underbanking. Individuals who do not possess a high school diploma are more likely to be without a bank account. This suggests that there’s a knowledge gap that’s preventing some people from taking full advantage of the banking system. Initiatives aimed at increasing financial literacy could be a step towards reducing the underbanked population.

Other demographics that are more likely to be underbanked include working-age disabled households and single-mother households, which can be considered as part of unbanked and underbanked households. These groups often face additional challenges that could make accessing traditional banking services difficult, such as physical mobility issues or time constraints. It’s crucial that financial institutions acknowledge and address these unique needs to ensure that everyone has access to the financial tools they need.

Challenges Faced by the Underbanked

Underbanked individuals face a myriad of challenges that prevent them from fully leveraging traditional banking services. For starters, traditional banking services can be inaccessible due to high fees, minimum balance requirements, and location constraints such as banking deserts: a lack of access to a bank or credit union within their neighborhoods. Imagine living in a rural area where the nearest bank branch is miles away. Even if you wanted to open a bank account, the distance and travel costs could make it impractical.

Another major challenge is the lack of opportunities to build a credit history. This is partly due to the reliance on alternative financial products like prepaid debit cards, which do not contribute to credit building. Without a solid credit history, it becomes difficult to secure loans, mortgages, or even sign up for certain services.

In addition, the underbanked often encounter barriers such as cultural and language differences, which can make navigating the banking system even more challenging. These factors can further reinforce their reliance on alternative financial services and perpetuate the cycle of being underbanked.

Alternative Financial Services for the Underbanked

Given the challenges faced by the underbanked, it’s no surprise that they often turn to alternative financial services. These include:

  • payday loans
  • check cashing services
  • pawnshop loans
  • rent-to-own agreements
  • prepaid debit cards

While these services might provide a temporary solution, they come with their own set of problems.

For one, alternative financial services are often more expensive and can be predatory, presenting high risks including the perpetuation of a cycle of debt due to their accessibility. For instance, a payday loan might seem like a quick fix for a cash crunch, but the high-interest rates can lead to a debt trap that’s hard to escape.

You might be wondering, “What is alternative credit?” Alternative credit refers to non-traditional forms of credit, such as payday loans and pawnshop loans. These services are typically used by individuals who don’t have access to traditional credit sources, such as credit cards or bank loans. While they can provide immediate financial relief, they often come with high costs and risks.

Pros and Cons

While alternative financial services come with their challenges, they do have certain advantages. One of the main reasons underbanked individuals choose these services is because their fees are clearly posted, making them seem more straightforward than traditional banks.

The advantages of alternative financial services, also known as alternative financial service, include:

  • Clearly posted fees, making them more transparent than traditional banks
  • Accessibility for underbanked individuals
  • Convenience and ease of use
  • Flexibility in terms of services offered

The opaque nature of bank account fees, often buried in various locations on a bank’s website, can be off-putting for potential customers.

However, this apparent transparency can be misleading. While the costs of using alternative financial services are upfront, they can accumulate over time to become more expensive than traditional banking services. For example, a prepaid card might have a small monthly fee, but over the course of a year, those fees can add up to a significant amount.

Moreover, underbanked individuals using financial technology tools generally incur additional fees for each tool they access. This means that while fintech can offer innovative solutions, it’s essential to be aware of the associated costs and ensure they’re sustainable in the long run.

Solutions and Initiatives to Support the Underbanked

Despite the challenges, there are solutions and initiatives aimed at supporting the underbanked. Some banks and credit unions offer second chance and low-fee bank accounts, adhering to stringent standards by the Cities for Financial Empowerment Fund, for individuals with a poor credit history. These accounts can provide a lifeline to those who have been excluded from the traditional banking system due to financial missteps in the past.

Recognizing the underbanked as a distinct customer group, some banks have created specialized departments to address their financial needs. This is a promising development, as it indicates that financial institutions are starting to take the underbanked issue seriously and are taking steps to provide tailored solutions.

Also, alternatives to traditional banking, such as digital banks and local community banks, are offering services tailored to the underbanked, expanding their access to financial tools. These institutions can provide a more inclusive banking experience, with lower fees, no minimum balance requirements, and customer-friendly services.

The Role of Fintech

Financial technology companies, or fintechs, have been at the forefront of addressing the underbanked issue. By offering automation programs for savings and budgeting, fintechs are aiding the underbanked in financial management. These tools can help individuals track their expenses, set financial goals, and make informed decisions about their money.

Mobile banking services are another fintech solution favored for their convenience, control over finances, and affordability, which are particularly beneficial for the underbanked. Through a mobile banking app, users can:

  • Check their account balance
  • Transfer money
  • Pay bills
  • Deposit checks

All from the comfort of their homes, or on the go. However, while online banking has the potential to improve physical access to banking services for the underbanked, it requires reliable internet access and appropriate banking technolog

y. This highlights the importance of ensuring that technological advancements in the financial sector are accessible and inclusive for all.

Tips for Transitioning from Underbanked to Fully Banked

Transitioning from underbanked to fully banked may seem daunting, but with the right tools and guidance, it’s achievable. One feasible step is to consider secured credit cards, which serve as a method for the underbanked to build a credit history by using a refundable security deposit to set their credit limit. This can pave the way towards obtaining traditional credit products in the future.

Second-chance bank accounts offer individuals with poor banking histories an opportunity to open a checking account and start anew. These accounts can provide a fresh start for those who have had negative experiences with banks in the past.

Additionally, individual development accounts are specially designed to assist low-income individuals in accruing assets and achieving financial stability.

Furthermore, online banks and mobile banking apps provide accessible checking or savings accounts from a smartphone, which is especially useful in the gig economy. With online bill pay, managing finances becomes even more convenient.

Credit unions offer member-owned, not-for-profit banking solutions with competitive rates on accounts and loans, potentially serving as an alternative to traditional banks.

Lastly, traditional banking options such as savings accounts, CDs, and money market accounts are often fee-free, can earn interest over time, and help money grow in a savings account.


In summary, being underbanked is a complex issue with numerous contributing factors. From high fees and minimum balance requirements to trust issues, geography and antiquated algorithms, the underbanked face numerous challenges in accessing traditional banking services. While alternative financial services often fill the gap, they can be costly and predatory, perpetuating a cycle of financial exclusion.

However, with targeted initiatives, innovative solutions, and inclusive financial products, the underbanked can transition to become fully banked. As we continue to advance toward a more inclusive financial system, it’s crucial to remember that everyone, regardless of their income, education, or past financial mistakes, deserves access to safe, affordable, and convenient financial services.

Frequently Asked Questions

What does it mean to be underbanked?

Being underbanked means having a bank account but limited access to traditional financial services, which often leads to reliance on alternative financial services like payday loans and check-cashing services.

How are underbanked individuals different from unbanked individuals?

Underbanked individuals have a bank account but rely on alternative financial services due to limited access, while unbanked individuals do not have a bank account and manage their finances in cash. This creates a difference in their financial management.

What are some challenges faced by underbanked individuals?

Underbanked individuals face challenges like high fees, minimum balance requirements, location constraints, and limited credit history opportunities, which can hinder their financial stability and growth.

What are alternative financial services, and why are they used by the underbanked?

Alternative financial services such as payday loans, check cashing, and prepaid debit cards are used by the underbanked because of their limited access to traditional banking services. These services provide them with necessary financial resources.

What are some solutions to help the underbanked?

To help the underbanked, consider updating your algorithms which measure their credit score, offering second chance and low-fee bank accounts, creating specialized banking departments, providing financial assistance, and developing digital banks tailored to their needs. These solutions can improve access to banking services for the underbanked.

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