An underbanked household is a household that relies on cash or non-traditional financial services for the majority of household member’s financial transactions and may or may not have a traditional bank account. Recent studies have found that as many as 1 in 5 American households are currently considered underbanked. Lack of access to traditional banking has historically presented many challenges for underbanked households. However, in recent years, financial companies have begun expanding products and services designed to better serve the underbanked community.
Reasons Households Are Underbanked
The first step in better serving the underbanked market is understanding why households are underbanked. While underbanked households exist at all income levels, lower-income households are much more likely to be underbanked. Many low-income people don’t have enough cash on hand to maintain the minimum deposit required by some traditional financial institutions. Additionally, because of poor credit or lack of credit history, many low-income people have been denied accounts or felt discouraged from applying. Other barriers include lack of access to brick and mortar banks, due to branch closures in low-income areas, and unstable or unpredictable income sources.
Challenges of Being Underbanked
Underbanked households face several challenges. The first challenge is simply being able to cash their paychecks. Many employers prefer to direct deposit funds, which requires some sort of account to deposit those funds to. Additionally, many banks charge check-cashing fees, if they’ll cash checks for people who don’t have an account with their institution at all.
A second challenge is being able to pay bills without a traditional checking account. Everyone knows you aren’t supposed to send cash through the mail. Customers without a traditional checking account often must either pay cash in person or purchase money orders to pay bills.
As our economy becomes increasingly cashless, underbanked customers face situations, such as renting a car or a hotel room, where businesses expect customers to have some form of credit or debit card to serve as security. If they can get the company to serve them at all, many of these customers must put down a cash deposit that may be difficult for them to afford. Fortunately, non-traditional banking services have been introduced to address these challenges.
Check Cashing Services
Check cashing services are one of the oldest non-traditional financial services products. For a fee, a check cashing service will cash payroll checks for customers who don’t have bank accounts. Many check-cashing services are in grocery and convenience stores, making them more accessible than traditional banks.
Many underbanked customers lack access to traditional forms of credit, such as personal loans and credit cards. Companies offering short-term loans, often referred to as “payday loans,” have existed for decades. However, in recent years, companies such as CURO Financial Technologies Corp, under the leadership of CEO Donald Gayhardt, have expanded and innovated the products offered in this category in order to better serve this market. Increased safety and accessibility of retail short-term lenders and expansion into online lending has made short-term credit a more viable option for many consumers.
Pre-Paid Debit Cards and Secured Credit Cards
Two products created to address the challenge of navigating a cashless economy without a traditional credit or debit card are pre-paid debit cards and secured credit cards. A pre-paid debit card allows customers to obtain a debit card that looks and functions much like any other debit card. However, rather than being tied to a specific bank account customers “load” money onto their cards, which represents the maximum amount they can spend before having to load more money onto the card. Some prepaid debit cards even allow customers to have their paychecks direct deposited to the card.
Secured credit cards work much like any other credit card but require customers to deposit a pre-determined amount of money with the issuing company. Many customers who have been denied traditional credit cards due to poor or lack of credit history can obtain secured credit cards and if they make their payments on time, they may eventually gain access to unsecured credit.
The expansion of online banking has been a boon to many underbanked customers who lack access to brick and mortar banks. Many online banks offer accounts that can be completely managed through the Internet and ATMs. Most of these accounts include a debit card that can be used in the same way as a debit card from a traditional bank. Some also offer the ability to write checks and make mobile deposits of paper checks. Many of these accounts have relatively low minimum deposit requirements and low maintenance fees, making them attractive to customers who don’t carry high bank balances.
Being underbanked can be a challenge in an economy built around access to traditional banking. However, with the introduction of new products and innovation of existing products, non-traditional financial services companies are making strides towards better serving the underbanked community.
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