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The Unbanked and Underbanked Population



Perhaps the most neglected issue in our current financial realm is the shocking 1.6 billion people around the world who do not have access to bank accounts or complete financial services. Many of us take twenty-first century luxuries like online banking for granted, unaware that we are very privileged compared to other populations. This vast unbanked group may lack information and knowledge that could substantially improve their financial situation and livelihood. While the bulk of the unbanked population lives in China, India, Pakistan, and Indonesia, 5% of the American populace also does not have a bank account. These statistics are a genuine issue, and I would argue that it is the responsibility of the microfinance movement to raise awareness, and reduce this problem around the globe.

Why does this Population Remain Unbanked?


The answer to this question varies depending on the country and circumstances of the individual, but the most common reason is simply the lack of funds to open an account. Most accounts from well-known banks require a minimum deposit amount – between $25 and $100 – and often minimum balances, too. For example, Wells Fargo requires a minimum opening deposit of $25 for its “Everyday Checking Account,” while its “Way2Save Savings Account” requires a minimum daily balance of $300, or else charges a monthly service fee. While this may not seem like a lot to the average citizen, many low-income workers often live paycheck-to-paycheck, and unexpected fees can be challenging. A key obstacle in most developing countries is accessibility, especially in areas where low percentages of individuals carry a smartphone or have reliable internet access. It is important to note that there are also some cultures where norms are in place related to women not having banking access. This is eventually prevalent in Arab States, who have a paternalistic and patriarchal approach to managing finances.


Benefits of Financial Inclusion for the Unbanked Population


Studies show that proper financial accessibility through banking could boost GDP by 14% in large developing economies like India and up to 30% in frontier markets while driving inclusive growth and boosting profit. This relates to ZiM’s overall objective of providing financial inclusion through microcredit initiatives for people who do not have household savings or bank accounts. Ultimately, reducing this unbanked population will improve the lives and well-being of many families around the world and restore trust in banking services altogether.


What About the United States?


The mentioned 5% of unbanked Americans may sound alarming, considering the relative advancements of the nation. Moreover, there is an additional 13% of Americans who are “underbanked,” as they have a bank account but often do not use traditional loans and credit cards to manage their finances, instead using payday lenders and money orders, which are much riskier. Young women aged 25-44 are the most likely to rely on these payday loans, especially African American mothers desperately trying to support their children. Though they know these risky loans can be harmful, these women have no other option, reinforcing the importance of financial literacy.


First Important Step: Improve Financial Literacy


Lack of financial literacy is an overlooked problem in the US, and it largely stems from poor public education policies. Out of public schools with low-income students (>75% of students qualify for free lunch), only 3.9% of schools require students to take a personal finance course, and only 52% of schools even have the option. All students attending public schools should be required to take a standalone personal finance and management course, which will greatly reduce the unbanked and underbanked numbers in our country. It also is the case that the Black and Hispanic populations have very high unbanked rates compared to the national average, due to low levels of financial literacy and distrust of financial institutions, due to the history of racism and exclusion. Even Black individuals in the same income brackets as members of other races will be disproportionately likely to experience denial of credit, further illustrating that our systems are not truly equal.

In the US, an increase in financial literacy rates and equal treatment of minorities by financial institutions seem like pragmatic solutions for the unbanked population. However, it is not as simple in developing nations, which do not have the same banking and education infrastructure in place. This is where social entrepreneurship, and specifically, microfinance comes into play. Microfinance organizations are prevalent in these developing countries and provide opportunities for low-income individuals that otherwise would not have access to banking. ZiM’s core tenets include certain financial literacy initiatives and promoting increased education, especially for economically marginalized groups, to convey the significant advantages of implementing smart financial habits. Though it is far from perfect in many cases, the altruistic values of microfinance in uplifting the unbanked population must be supported to further equality across the globe.


 

By Ryan Sullivan

 


Works Cited


Bellens, Jan. “How Banks Can Play a Stronger Role in Accelerating Financial Inclusion.” EY, EY, 25 Apr. 2018, https://www.ey.com/en_us/trust/can-inclusive-banking-drive-economic-growth-in-emerging-markets.

Birken, Emily Guy. “The Costs of Being Unbanked or Underbanked.” Forbes, Forbes Magazine, 17 Oct. 2022, https://www.forbes.com/advisor/banking/costs-of-being-unbanked-or-underbanked/#:~:text=How%20large%20is%20the%20unbanked,households%20and%20households%20of%20color.

Bronson, By: Eric. “How Black Mothers Are Disproportionately Impacted by Payday Loans.” YWCA Seattle | King | Snohomish, 2018, https://www.ywcaworks.org/blogs/firesteel/tue-09182018-0930/how-black-mothers-are-disproportionately-impacted-payday-loans.

“Economic Well-Being of U.S. Households in 2020 - May 2021 - Banking and Credit.” Board of Governors of the Federal Reserve System, 13 June 2022, https://www.federalreserve.gov/publications/2021-economic-well-being-of-us-households-in-2020-banking-and-credit.htm.

Egan, John. “Bank Account Minimum Deposit and Minimum Balance Requirements.” Forbes, Forbes Magazine, 24 Jan. 2023, https://www.forbes.com/advisor/banking/bank-account-minimum-deposit-minimum-balance-requirements/.

El-Zoghbi, Mayada. “What Excludes Women from Formal Finance in the Arab States?” CGAP, 2016, https://www.cgap.org/blog/what-excludes-women-formal-finance-in-arab-states.

Principato, Charlotte. “How the Roughly One-Quarter of Underbanked U.S. Adults Differ from Fully Banked Individuals.” Morning Consult, 6 Oct. 2022, https://morningconsult.com/2021/08/17/unbanked-underbanked-demographic-profile/.

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