6 Strategies for Banking the Unbanked

Although opening a bank account might be a rite of passage for people around the world, a significant portion of the global population either doesn’t have any form of bank account or doesn’t use a bank for a notable portion of their financial needs. People who are unbanked or underbanked tend to use alternative forms of financial services, such as check-cashing outlets, payday lenders, and money orders to handle their monetary needs. 

Alternative financial services (AFS) tend to provide services that are very similar to those offered by traditional banks, but usually at a higher price point. While alternative financial services provide some benefits to consumers who don’t have a bank account — such as easy access — the services themselves are usually considerably more expensive than comparable ones offered by a bank. 

While the number of unbanked people around the world remains high, the number has been falling in recent years. Financial institutions and banks that are interested in connecting with unbanked or underbanked consumers have multiple options for banking the unbanked and increasing the number of people who have accounts. 

What Is an “Unbanked” Customer?

An unbanked customer is a person who does not have a savings or checking account with a bank or credit union. People who are unbanked don’t have access to savings or checking accounts and don’t use other traditional banking services, such as loans or credit cards.

In addition to people who are unbanked, some are “underbanked.” Underbanked individuals or households might have access to a checking or savings account through a traditional financial institution — but they also use AFS or have used AFS at some point during the past year. 

The reasons why a household or individual might not use a traditional bank or financial institution can vary. Some common reasons people cite for being unbanked or underbanked include:

• Not having enough money: A 2017 survey by the Federal Deposit Insurance Corporation (FDIC) found that the most common reason people didn’t use traditional banking services was that they didn’t think they had enough money to put into an account. More than half of the unbanked cited a lack of funds as a reason for being unbanked. More than one-third of respondents stated that it was the main reason for not having a bank account.  
• Having concerns about privacy and trust: Some people just don’t trust banks. The FDIC survey found that more than 30% of respondents stated that they didn’t trust banks, and around 28% of respondents stated that they believed avoiding banks helped them maintain privacy.
• Having worries about fees and costs: Having a checking or savings account can cost money, depending on the financial institution. Two commonly cited reasons for avoiding bank accounts were concerns that the fees were too high or concerns about the unpredictable nature of fees. Among the unbanked in Latin America, the cost was a commonly cited reason for not having a bank account.
• Finding banks inconvenient: In the past, hours of operation at many banks weren’t exactly the most convenient. Banks were traditionally open on weekdays only and usually only until the late afternoon. If a bank was open on the weekend, it was for very limited hours. Also, in the past, people would need to visit a bank in person to take care of their financial needs. While that has changed in recent years, thanks to online and mobile applications, many unbanked or underbanked people still believe that banks are inconvenient. 
• Believing that banks don’t offer the services a person needs: A smaller portion of the unbanked and underbanked population believes that traditional financial institutions just don’t offer the services they need.

How Much of the World Is Unbanked?

The number of unbanked people has been falling worldwide in recent years. In 2010, 2.5 billion people around the world were unbanked. By 2014, the number had fallen to 2 billion. As of 2017 — the most recent year for which figures are available — 1.7 billion people are unbanked. Unbanked and underbanked individuals are located around the world, in both wealthy, developed countries, and in developing countries. 

The majority of the unbanked population resides in developing countries. Seven countries have almost half of the world’s unbanked population:

• China: 13%
• India: 11%
• Indonesia: 6%
• Pakistan: 6%
• Nigeria: 4%
• Mexico: 3% 
• Bangladesh: 3%

The number of unbanked people in America has also fallen in recent years. In 2017, 6.5% of U.S. households were unbanked, down from 8.2% in 2011. About 8.4 million households in the U.S. didn’t use any type of traditional banking services. In addition to the fully unbanked, another 18.7% of U.S. households were underbanked as of 2017. These households had a savings or checking account but also made use of AFS at some point during the year.

Age, gender, and household income also have some influence on whether or not a household or individual is likely to be unbanked or not. Globally, women are more likely to be unbanked than men. As of 2017, 56% of the global unbanked population are women. Women are more likely to be unbanked in countries where the percentage of unbanked individuals is low and in countries with a lot of unbanked people. 

Households with the lowest income are also more likely not to have bank accounts. In countries where few households were unbanked, the majority of those households were in the lowest income brackets. There is more equality among the unbanked in countries that have a significant portion of the population without a traditional bank account. In Pakistan, for example, more than half of the unbanked population was made up of the richest households. 

Globally, younger people are more likely not to have bank accounts or to be underserved by banks than older people. Around 30% of unbanked people were between the ages of 15 and 24 in 2017. 

A similar pattern has emerged in the U.S. Younger households in the U.S. are more likely not to have bank accounts compared to older households. In 2017, 3.9% of households with people over the age of 65 were unbanked, compared to 8.5% of households with people between the ages of 25 and 34. 

Why Reaching the Unbanked Matters to You

Even though the number of unbanked households and individuals worldwide has been falling, there is still a significant portion of the population who do not have access to or use traditional banking services. For many financial institutions, the unbanked population can be a missed opportunity. If traditional banks do not find ways to engage with the unbanked or underbanked, AFS providers will. And, with the rise of technology such as mobile phones and the internet, technology companies that have previously not offered financial services are likely to find ways to do so.

Reaching the unbanked matters more than ever, as the methods of payment are shifting. In the past, it wasn’t uncommon for people to get paid in cash for their work. But as companies and employers shift to digitized payments, such as direct deposit and automated clearinghouse transfers (ACH), employees who previously got paid money need to find a way to receive their payments. Around 9% of the global population opened a bank account to start receiving payment from their employers. 

As more and more people seek out digital payment options and move away from a cash-based economy, opportunities can increase for traditional financial institutions. Some of the reasons why you should focus on reaching the unbanked include:

• Increases revenue for financial institutions: The more customers a bank has, the more revenue it earns. When more people deposit money into a savings account or open up lines of credit or credit cards with a bank, more income is produced for the bank.
• Creates an opportunity for an emerging middle class: Increasing access to banking services allows a middle class to develop and thrive in countries around the world. Although AFS are often seen as affordable or accessible options for the people who use them, services such as payday loans and check cashing are often very expensive compared to traditional bank-offered services, like accounts and loans. By offering the unbanked a safe place to keep their money, banks can help to reduce or break the cycle of poverty.
• Connects you to an emerging market: In some countries, the majority of unbanked individuals own or have access to a mobile phone. Mobile banking technology, such as apps that let people access their accounts and deposit money, lets traditional financial institutions connect with people who wouldn’t otherwise step foot inside a traditional bank.

How to Reach the Unbanked in Six Steps

As a traditional financial institution, there are multiple things you can do to engage with the unbanked and to encourage people to open accounts or otherwise use your services. Part of banking the unbanked involves shifting people’s perspectives on what a traditional financial institution is and what it offers. Follow these steps to connect with unbanked and underbanked individuals.

1. Eliminate Barriers  

The majority of unbanked people in the U.S. believe that having a saving or checking account at a traditional financial institution is somehow out of reach. It’s true that some banks charge fees that make having an account financially challenging. In some cases, a bank might have account minimums that are difficult for people on lower incomes to maintain.

If you want to reach the unbanked, the first thing to do is get rid of the things that stand in their way. That can be monthly account fees, minimum balance requirements, or other expectations, such as requiring an account holder to receive direct deposit. People often open an account when they get a job that pays via direct deposit, only to end up closing the account if they lose their job and the source of the deposit later on.

2. Create Mobile Apps

Mobile use has surpassed desktop use among people around the world. In the U.S., the percentage of the population with a smartphone increased to 81% in 2019, from 35% in 2011. Around 37% of U.S. adults primarily use their phones to get online. 

The rise of mobile internet has led to a drop in home broadband use. Less than three-quarters of U.S. households have a broadband internet connection at home. The percentage of homes with a high-speed home internet connection drops as income levels fall. As people with lower income levels are more likely to be unbanked or underbanked, the number of unbanked people who rely on a mobile device and not a home internet connection is likely to be high. 

If your bank wants to make its services accessible and convenient to unbanked or underbanked individuals, it needs to start thinking mobile-first. Along with developing mobile apps that give people access to their account information, you should focus on producing apps that have a lot of functionality. People should be able to transfer money within accounts, pay bills, and deposit paper checks using a mobile banking app. 

3. Decrease Reliance on Physical Branches

Along with shifting your focus to mobile banking, it’s also useful to shift focus away from physical branches. At some financial institutions, certain tasks can only be performed in-person, such as opening an account. If banking hours and locations aren’t convenient for individuals, they are likely to seek out similar services from companies that are more convenient to them. 

Finding ways to verify identities, such as biometrics or two-factor authentication, can make it possible for a financial institution to offer services online or through a mobile app that once needed to be performed on-site.

4. Offer Prepaid Products as a Stepping Stone

A prepaid card can be a stepping stone or bridge product to offer people who are unbanked or underbanked. In 2017, nearly 27% of unbanked households in the U.S. used prepaid cards, compared to around 15% of underbanked households and around 7% of fully banked households. 

Although people are most likely to purchase prepaid cards from a non-bank store or website, around 14% of the cards were purchased at banks. Additionally, among the unbanked households that used prepaid cards in 2017, more than 60% had had a bank account in the past. 

Offering prepaid cards to customers can be an effective way to convince currently unbanked individuals to begin to use other services, such as opening a saving or checking account. 

5. Create Financial Education Opportunities

Mistrust in banks is another significant reason why people do not have accounts or don’t use bank services. One way to instill a sense of trust in consumers is to create educational opportunities for them. A bank can create short video tutorials on topics such as saving money, applying for credit, or opening a checking account. The videos can be available on the banks’ mobile website or through an app. 

Virtual assistants that answer consumers’ financial questions or that provide information and guidance can also help a bank to build trust with unbanked consumers. 

6. Expand Credit and Loan Options

Some individuals in the U.S. aren’t only unbanked, they are also “credit invisible,” meaning they don’t have any credit history. About 10% of the U.S. population is credit invisible, making it difficult for them to get traditional loans or credit from banks. If a bank wants to connect with credit invisible individuals, it has some options. 

One is to use non-traditional payment data, such as on-time rent and utility bills when assessing an individual’s creditworthiness. Another option is to expand credit-building loan options available to individuals, such as secured credit cards or credit-builder personal loans. It’s also possible to use technology to begin to offer peer-to-peer lending or crowdfunding to traditionally underserved consumers.