What is Underbanked?

1421 reads · Last updated: December 5, 2024

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.

Definition

The term 'Underbanked' refers to individuals who have a bank account but do not fully utilize traditional financial services. These people, despite having basic bank accounts, rely on alternative financial services such as check cashing, prepaid debit cards, remittance services, and payday loans due to various reasons like trust issues, high costs, or lack of financial knowledge.

Origin

The concept of the underbanked emerged with the proliferation of financial services, particularly in the late 20th and early 21st centuries. As banking services became more diverse and complex, more people began to rely on alternative financial services. Economic instability and financial crises have also exacerbated this phenomenon, as many lost trust in the traditional banking system.

Categories and Features

The main features of the underbanked include:
1. Having a bank account: Typically, they have one or more bank accounts.
2. Underutilization: Despite having bank accounts, they rarely or never use services like deposits, loans, or credit cards offered by banks.
3. Alternative financial services: They frequently use non-traditional financial services such as check cashing, prepaid debit cards, remittance services, and payday loans.
4. Financial exclusion: They face financial exclusion or difficulty accessing traditional financial services, leading to reliance on high-cost and high-risk alternative financial services.

Case Studies

Case Study 1: In the United States, many low-income families, due to distrust in banks or high fees, choose to cash their paychecks through check-cashing companies and use prepaid debit cards for daily expenses. This situation prevents them from fully utilizing banking services like deposits and loans, classifying them as underbanked.
Case Study 2: In India, despite government efforts to promote financial inclusion, many rural residents still rely on informal financial services like local moneylenders and remittance agents because they find bank procedures confusing or untrustworthy.

Common Issues

Common issues include:
1. Why do the underbanked not use banking services? The main reasons include distrust in banks, high fees, and lack of financial knowledge.
2. How do the underbanked affect the economy? Their existence can lead to higher rates of financial exclusion and increased reliance on high-cost financial services.

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