Underbanked
The Underbanked refers to individuals who have a bank account but do not fully utilize traditional financial services. These individuals have basic bank accounts but rely heavily on alternative financial services such as check cashing, prepaid debit cards, money orders, and payday loans due to various reasons like trust issues, high costs, or lack of financial literacy.
Key characteristics include:
Having Bank Accounts: Underbanked individuals typically have one or more bank accounts.
Underutilization: Despite having bank accounts, they seldom or never use services such as savings, loans, and credit cards offered by banks.
Alternative Financial Services: Frequently use non-traditional financial services like check cashing, prepaid debit cards, money orders, and payday loans.
Financial Exclusion: Face financial exclusion or difficulty accessing traditional financial services, leading to reliance on costly and high-risk alternative financial services.
Example of Underbanked application:
Suppose a person has a bank account but prefers to cash their paycheck at a check cashing company due to mistrust in banks or high banking fees. They also use a prepaid debit card for daily transactions. This individual is not fully utilizing the deposit and loan services offered by their bank and is considered underbanked.
Underbanked
The underbanked are individuals who have bank accounts but do not fully utilize traditional financial services. Although they have basic bank accounts, due to various reasons such as trust issues, high costs, and lack of financial knowledge, they primarily rely on alternative financial services like check cashing, prepaid debit cards, remittance services, and payday loans.
Origin
The concept of the underbanked originated from studies on financial exclusion. As the financial system developed, more people gained access to bank accounts, but not everyone could fully utilize these services. In the late 20th and early 21st centuries, researchers began to focus on those who, despite having bank accounts, still relied on alternative financial services, defining them as the “underbanked.”
Categories and Characteristics
The underbanked typically exhibit the following characteristics:
- Have bank accounts: The underbanked usually have one or more bank accounts.
- Underutilization: Despite having bank accounts, they rarely or never use services like deposits, loans, and credit cards offered by banks.
- Alternative financial services: They frequently use non-traditional financial services such as check cashing, prepaid debit cards, remittance services, and payday loans.
- Financial exclusion: They face financial exclusion or difficulty accessing traditional financial services, leading them to rely on high-cost and high-risk alternative financial services.
Case Studies
Case 1: Suppose an individual has a bank account but, due to distrust in banks or high banking fees, chooses to cash their paycheck through a check-cashing company and uses a prepaid debit card for daily expenses. This situation prevents them from fully utilizing banking services like deposits and loans, classifying them as underbanked.
Case 2: Another example of an underbanked individual could be a small business owner who has a business bank account but, due to strict and lengthy bank loan approval processes, opts for payday loans to address short-term cash flow issues. This high-cost borrowing method increases their financial burden.
Common Questions
Why do the underbanked not use traditional banking services? The main reasons include distrust in banks, high banking fees, lack of financial knowledge, and the complexity of banking services.
How do the underbanked impact the economy? Due to their reliance on high-cost alternative financial services, the underbanked often face higher financial stress, which can lead to higher debt levels and lower savings rates, thereby affecting overall economic health.
