Make the Invisible Underbanked Visible: Who Are the Underbanked?

Financial inclusion, efforts that expand access to basic banking products and services to address economic inequality, have mostly focused on bringing unbanked individuals to mainstream financial services. These efforts unintentionally leave out the underbanked, who use a bank account and alternative financial services (AFS) simultaneously. Despite that one third to one half of American households are underbanked, their unique characteristics are obscured by a dichotomous banked-unbanked framework adopted by most existing studies investigating financial inclusion. Failure to identify the underbanked group underestimates the prevalence and magnitude of banking access, as well as obscures the pervasive roles of their financial circumstances and the fringe economy in American households’ financial lives. The current study is the first known investigation to explicitly examine the underbanked group and delineate critical differences in financial circumstances between the underbanked and banked.

This study used data from the 2015 National Financial Capability Study state-by-state dataset, a large national survey of U.S. adults and households (N= 27,564). The dependent variable was underbanked status, which was dichotomously coded 0 if a banked study participant did not use any AFS and 1 if used one of the six AFS products. Key independent variables measured financial circumstances (i.e., income volatility, health insurance coverage, receipt of welfare benefits, self-reported credit records). Also included in the model were sociodemographic variables (i.e., age, gender, race, dependent children, educational level, household income, employment status, marital status, home ownership). Logistic regression was employed to identify financial circumstance as well as socioeconomic variables associated with underbanked status.

Twenty-three percent of the sample was underbanked, and those who were female (OR=0.67, z = -10.85), black (OR = 1.63, z = 8.99), had dependent children (OR = 1.63, z = 11.90), were in lower income quintiles (OR = 1.34, z = 4.43), and had lower educational attainment (OR = 0.79, z = -5.78) were likely to be underbanked. In addition, low self-rated credit record (OR = 0.58, z = -32.99), low levels of financial knowledge (OR = 0.89, z = -9.76), no health insurance coverage (OR = 0.85, z = -2.89), receipt of welfare benefits (OR = 2.13, z = 17.11), and income volatility (OR = 1.78, z = 14.38) were associated with underbanked status. Variables such as marital status and employment status were not associated with underbanked status.

The underbanked group is sizable and distinctively different from the banked groups. The findings indicated that experiencing income volatility and receiving welfare benefits predispose individuals to becoming underbanked. This suggests that financial circumstances place individuals at greater risk for using AFS despite having a bank account. Our findings yield implications for financial inclusion efforts such as Bank On regarding future target population for interventions. Meanwhile, this study spotlights the need for expanding the current, limited analytical framework to gain a more complete understanding of banking practices of individuals who are underbanked.