What Does It Mean to Be Unbanked?

The term “unbanked” applies to an individual or household that doesn’t use a bank or credit union for financial services. An unbanked adult has no checking or savings account, relying instead on alternative financial services to pay for life’s expenses.

While storing cash under a mattress might be tempting, being unbanked is often both expensive and impractical. The benefits of traditional banking generally outweigh the alternatives, though many people face barriers when attempting to access a bank or credit union. Below we explore why people become unbanked, the associated pros and cons, and how to open a bank account — even if you’ve had difficulties with banking in the past.

What Does Unbanked Mean?

First, it’s important to understand the definition of “unbanked.” If a person is unbanked, that means they are not served by a bank or similar financial institution. If you are over the age of 18 and have no checking or savings account, you are considered to be an unbanked adult.

You may wonder, how do unbanked adults conduct financial transactions? How do they go about cashing checks and paying bills without a bank account?

Many unbanked individuals deal primarily in cash, whether by personal preference or due to their circumstances. To manage everyday financial tasks, they often rely on a combination of cash, check-cashing services, prepaid debit cards, and money orders.

These days, digital alternatives are also expanding how people manage and move money without a traditional bank account. For instance, cryptocurrency and newer blockchain-based international remittance options allow anyone with a smartphone or internet connection to store assets or send funds directly to a recipient’s mobile digital wallet quickly and at a relatively low cost.

Why Do People Become Unbanked?

People become unbanked for various reasons. These can include:

•   Lack of money to meet minimum opening balance requirements at financial institutions

•   Lack of the credentials needed to open bank accounts (such as a Social Security number)

•   An underlying distrust of financial institutions

•   A desire to avoid any fees involved in opening a checking or savings account, or the penalties for incurring a negative bank account balance

•   Inability to open an account due to having a previous account closed by a bank or credit union

•   Living too far away from a brick-and-mortar banking location or being unable to drive or take transportation to a financial institution

•   Lacking a computer, a wifi connection, and/or the technology skills to open an account online.

How Many People are Unbanked in the U.S.?

The United States has a considerable number of unbanked adults. According to the Federal Reserve, 6% adults were “unbanked” in 2024 (their most recent statistic). While that’s a significant number, it’s worth noting that other nations have much larger percentages of unbanked people. Countries with some of the highest rates of unbanked people include Bangladesh, Egypt, and Pakistan, all with unbanked populations of around 50%.

What Are the Types of People Who Are Unbanked?

According to the most recently available data from the Federal Reserve and the FDIC, the unbanked population tends to fall into the following demographics:

Low-income: Families making below $25,000/year are disproportionately unbanked. The Federal Reserve notes that nearly all adults with an income of at least $100,000 have an account, while lower-income brackets face the highest barrier to entry.

Less-educated: A higher percentage of unbanked individuals never graduated from high school. Financial exclusion drops significantly as education levels increase.

Racial disparities: Black, Hispanic, and Indigenous adults are disproportionately unbanked relative to their population size.

Households with disabilities: Federal data indicates that adults with a disability experience significantly higher unbanked rates.

Young people: Younger adults (ages 18–29) tend to be unbanked more often than older adults. This is primarily due to lacking the funds for minimum balance requirements, though lower financial know-how and a growing preference for mobile payment apps and digital wallets over traditional banks also play key roles.

What Is the Difference Between Unbanked and Underbanked?

You may also have heard the term underbanked as well as unbanked. An underbanked person typically does have a checking and savings account with an FDIC-insured institution, but regularly relies on alternative financial services. Despite having traditional accounts, they may still utilize check-cashing services, money orders, and short-term payday loans.

According to the most recent FDIC data (2023), 14.2% of U.S. households are underbanked. While the completely unbanked population faces barriers like a lack of access, ID issues, or previous account closures, the underbanked typically rely on alternative services due to credit limitations, a desire to avoid steep overdraft fees, branch proximity issues, or the need for immediate cash access that traditional banks fail to provide.

Initiatives to Help the Unbanked

Being unbanked can make it a challenge for a person to manage their money and build wealth. Fortunately, government programs and some financial entities are working to solve this issue. They are developing new ways to provide incentives and encourage unbanked individuals to choose traditional banking options. These include:

•   Eliminating banking fees. Getting rid of minimum balance requirements, monthly account fees, and other financial deterrents can encourage low-income individuals to open an account.

•   Developing user-friendly apps and online platforms. Online banking via a computer or phone app can help make it easier for people who don’t have a convenient banking branch or have physical challenges.

•   Second chance accounts. Some banks may offer a second chance checking account. When opening this type of account, the bank is often willing to overlook previous banking problems, such as unpaid overdraft fees or past forced account closures. The account will likely have some limitations, but it can be an on-ramp to a standard checking account.

•   Bringing back postal banking. Decades ago, an individual could perform basic banking transactions at their local post office — cashing checks, bill payment processing, sending money to other branches, and issuing modest loans. Today, a growing movement advocates for the return of these services.

•   Educational outreach. Many banks and nonprofit organizations offer financial literacy programs, including workshops and videos, to educate unbanked and underbanked individuals about basic financial concepts, such as how to balance your bank account, budgeting, saving, and credit.

Why Is Being Unbanked a Problem?

Being unbanked can be a problem for a few reasons. For example:

•   It can be complicated and time-consuming to conduct financial transactions without having standard bank accounts.

•   Being unbanked can be expensive as well. You may have to pay high fees for check cashing and other services from predatory businesses. Plus, you won’t early any interest on your money.

•   It can be risky to carry and store cash versus safely keeping it with a bank or credit union.

Pros of Being Unbanked

Being unbanked could be seen as a positive for some people. Potential upsides include:

•   Not having to deal with the bureaucracy or paperwork of opening and maintaining accounts at banks

•   No checking or savings account fees

•   No overdraft or minimum balance fees

•   No risk of having your money frozen, restricted, or subjected to sudden account-closing decisions by a bank policy

•   Can be seen as more convenient to use cash vs. using debit cards, ATMs, and bank branches.

Cons of Being Unbanked

As mentioned, being unbanked can be problematic. Those who don’t have checking and savings account may find that:

•   Using prepaid debit cards, money orders, and similar products to pay bills can be costly (fees) and time-consuming.

•   Carrying and/or keeping cash at home can be risky; what happens if you are robbed?

•   No convenient direct deposit for paychecks. The unbanked may have to utilize a check-cashing or payday loan service, which can charge very high fees or interest rates.

•   No opportunity to build up a banking history for future opportunities

•   No access to other products and services that banks may offer when you are a customer, such as cashback programs or better mortgage rates.

Opening a Bank Account

While many people hesitate to open a bank account, being unbanked often limits security, increases transaction costs, and prevents potential interest earnings.

Opening an account is typically a straightforward process. Requirements vary by institution, but you generally need:

•   A valid government-issued photo ID

•   A Social Security number or taxpayer ID number

•   Proof of address

After selecting a financial institution, you can often complete the sign-up process quickly, either in person or online. Many banks now offer accounts with no minimum balance requirements or initial deposit.

Overcoming Barriers to Banking

If you have faced banking challenges in the past, such as forced account closures, you may still have options.

•   Second chance accounts: Some banks offer “second chance” checking accounts, which provide a path to standard banking. While these accounts may have limitations, such as restricted overdraft protection, they are a practical step toward building a healthy banking history.

•   Starting fresh: If you previously had an account that was closed, it is typically not possible to reopen it. In such cases, the best approach is to open a new account, either with your previous financial institution or a new one.

The Takeaway

By choice or circumstance, millions of Americans are unbanked. Typically, this means they don’t have a checking or savings account and don’t participate in personal banking. There can definitely be a downside to being unbanked, including factors like spending more time and money to conduct banking transactions and not earning any interest on one’s funds. For many people, becoming a client of a bank or credit union can be a positive step towards improving their money management and building wealth.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What does it mean when a person is unbanked?

An unbanked person does not have a checking or savings account at a mainstream bank or credit union. Instead of traditional banking, they rely completely on cash, money orders, payday lenders, check-cashing services, or prepaid cards to manage their finances. This often happens because of high account fees, lack of required identification, minimum balance requirements, or a basic distrust of financial institutions.

What are the needs of the unbanked?

The unbanked require safe, accessible, and affordable financial services to manage daily life and build long-term security. Their primary need is secure storage to protect money from theft. They also require low-cost payment options to pay bills, transfer money, and send remittances without heavy fees. In addition, access to fair credit is important for handling unexpected emergencies or growing a small business without relying on predatory lenders. Finally, flexible savings tools can help them accumulate wealth. Meeting these core needs can allow individuals to move away from risky, cash-only constraints and fully participate in the formal modern economy.

How do unbanked people get paid?

Unbanked workers receive payments through several alternative methods. Many accept traditional paper checks, which they cash at retail stores or specialized check-cashing outlets for a fee. Others use payroll cards, which are reloadable prepaid cards funded directly by employers for use at ATMs and cash registers. Digital options like some mobile wallets and peer-to-peer payment apps allow workers to receive and spend funds electronically without a traditional bank account. Some individuals rely on direct cash payments for informal or freelance gigs. Finally, a growing number utilize cryptocurrency transfers sent directly to private digital wallets.

Photo credit: iStock/Deagreez

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