Millions of Americans live without a bank account or depend on costly services like payday loans, check-cashing outlets, or money orders. This may seem surprising in a country where banking is so common, yet millions are excluded or choose not to participate.
Being unbanked means having no bank account at all. Being underbanked means someone may have an account, but they still rely on alternative financial services for everyday needs.
In this article, we’ll break down the most common reasons why people are unbanked or underbanked, backed by real data and examples, and explain how it affects households across the country.
What Does It Mean to Be Unbanked or Underbanked?
The terms unbanked and underbanked are often used together, but they describe different situations.
- Unbanked: People who do not have a checking or savings account with a bank or credit union.
- Underbanked: People who may have an account but still depend on non-traditional financial services like payday loans, check cashing, or money orders.
According to the Federal Deposit Insurance Corporation (FDIC), more than 5 million households in the United States are unbanked, while over 14 million are underbanked. Globally, the number is much higher, with hundreds of millions lacking access to safe and affordable banking options.
This matters because being unbanked or underbanked can make it harder to build a strong credit score, qualify for loans, or save money securely. It often leads to higher costs for financial transactions and limited opportunities to improve long-term financial stability.
5 Common Reasons People Are Unbanked
While millions of households in the United States have access to banking services, many choose not to open an account. The reasons usually connect to trust issues, fees, or barriers that make traditional banking feel inaccessible.
1. Lack of Trust in Banks
For some, banks carry a negative reputation. Past experiences with surprise charges, sudden account closures, or even discrimination have created lasting skepticism. Others fear that if a bank fails, their money will disappear, despite federal deposit insurance protections.
2. High and Hidden Bank Fees
Bank accounts often come with charges that can quickly add up. Overdraft fees, minimum balance penalties, and nonsufficient funds fees are especially tough for people with limited income. This unpredictability makes many prefer cash or alternative services.
Common Bank Fees Compared to Alternatives
| Service | Average Cost | Why People Avoid Banks |
|---|---|---|
| Overdraft fee | $35 per transaction | Can lead to a cycle of debt |
| Minimum balance fee | $5–$15 per month | Penalizes people without steady savings |
| Check-cashing service | 1%–5% of check value | Seen as more predictable than bank charges |
3. Low or Unpredictable Income
Households living paycheck to paycheck often struggle to meet account requirements. Without reliable income, maintaining minimum balances becomes difficult. For many, using cash feels safer than risking fees and account closures.
4. Negative Banking History
Banks track customer behavior through systems like ChexSystems or Early Warning Services. When someone has unpaid fees or repeated overdrafts, these records may prevent them from opening a new account. Once flagged, people can find themselves excluded from mainstream banking.
5. Immigration or Documentation Barriers
Some households lack the paperwork required to open an account. Without a Social Security number or government-issued ID, applicants may be denied. Language differences or fear related to immigration status also discourage many from even applying.
4 Common Reasons People Are Underbanked
Some households do have a checking or savings account, but they still turn to payday lenders, check-cashing stores, or money orders. These patterns often reflect barriers or habits that keep people from fully benefiting from traditional banking.
1. Reliance on Alternative Financial Services
Even with a bank account, many people continue to use services like payday loans, check-cashing outlets, and pawnshops. These services are costly, but they are often seen as convenient or more predictable than bank fees.
2. Limited Access to Bank Branches
In rural towns and low-income neighborhoods, bank branches may be few and far between. This creates what researchers call “banking deserts.” For those without reliable transportation or internet, accessing an account becomes difficult, so cash-based alternatives feel easier.
3. Mistrust of Digital Banking
Not everyone is comfortable with online or mobile banking. Concerns about fraud, identity theft, or simply a preference for cash keep many households from depending fully on their bank account. This leads them to still use money orders or check-cashing services.
4. Cultural and Educational Barriers
Limited financial literacy can make banking feel confusing or risky. Language differences also play a role, particularly for immigrant families. Without clear guidance, people may stick to familiar cash-based methods instead of using a bank account for all their needs.
Comparison: Banking Costs vs. Alternative Services
People often think banking is expensive, but relying on alternatives like payday loans or check-cashing services can be far more costly over time. Looking at the numbers makes the tradeoffs clear.
Banking Costs Compared to Alternative Services
| Service | Typical Cost | Long-Term Impact |
|---|---|---|
| Bank overdraft fee | $35 per transaction | Repeated overdrafts can add hundreds each year |
| Monthly maintenance fee | $5–$15 | Avoidable with low-fee or digital-first accounts |
| Payday loan | 300%–400% APR | Debt cycle can form if loans are rolled over |
| Check-cashing service | 1%–5% of check value | Regular use erodes income quickly |
| Money order | $1–$5 each | Adds up for people paying many bills monthly |
While bank fees can feel unpredictable, the cost of using alternatives is often higher in the long run. Many people still choose them because they offer immediate access to cash, clear terms, or simply because banking feels out of reach.
The Bigger Picture: Consequences of Being Unbanked or Underbanked
Living outside the banking system carries real financial consequences. Beyond higher fees, it can block people from opportunities to build wealth and protect their money.
- Higher reliance on cash: Carrying and storing cash creates safety risks and makes it easier to lose money to theft.
- Difficulty building credit history: Without a bank account, it is harder to access tools that help grow a strong credit score.
- Exclusion from affordable loans and mortgages: Without a record of responsible banking, people often get stuck with costly financial products instead of fair loans.
Potential Solutions and Alternatives
There are programs and products designed to make banking more accessible. These options can help people avoid the cycle of fees and costly alternatives.
Banking Industry Initiatives
Banks and credit unions have created low-fee or no-fee accounts aimed at people with limited income. Many also offer second-chance checking programs for those with negative histories in databases like ChexSystems.
Government and Policy Programs
The FDIC promotes efforts to expand access to safe and affordable accounts. Some policymakers have pushed for postal banking, which would give households easier access in underserved areas. Government programs that require direct deposit for benefits also encourage participation in the banking system.
Personal Steps for Consumers
For people seeking options right now, credit unions and community banks often provide more flexible requirements than large banks. Digital-first banks may skip ChexSystems checks and waive many fees. Prepaid debit cards can also serve as a bridge until a checking account becomes possible.
Conclusion
Millions remain unbanked or underbanked because of trust issues, fees, income challenges, and barriers tied to access or documentation. The cost of relying on alternatives is often higher than banking itself, yet people choose them because they are more predictable or convenient.
Expanding access to affordable accounts and promoting financial education can make a meaningful difference. For those looking for solutions today, options like credit unions, digital banks, and second-chance programs can help open the door to better financial stability.
