The Costs of Being Unbanked (and How to Minimize Them)

American unbanked households could be spending $230 million a year for just three financial services, but not all are ready to open accounts.
Elizabeth Renter
By Elizabeth Renter 
Published
Edited by Kathy Hinson

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American households without bank accounts could be spending $230 million a year for just three financial services they use outside the banking system. But not all “unbanked” households are ready to open accounts.

Just 4.5% of American households — roughly 5.9 million of them — operate without an account at a bank or credit union, according to a 2021 survey from the Federal Deposit Insurance Corp., a number that has fallen from 6.5% in 2017. Going without a bank account can be costly because you’re forced to navigate paying for financial services such as cashing your paycheck. But getting a bank account can also have financial barriers to entry — you may need a minimum opening balance or to maintain a minimum balance to get monthly fees waived. In addition, people with an irregular income or who live paycheck to paycheck, who may be more likely to overdraw their accounts, may face hefty overdraft fees. When asked their reasons for not having an account, 40% of unbanked households say not being able to meet minimum balances keeps them away; 30% say fees are too high.

But being unbanked isn’t only a financial decision. Privacy concerns (cited by 34%) and distrust of banks (33%) are also top reasons cited in the FDIC’s National Survey of Unbanked and Underbanked Households, suggesting that opting out of traditional banking is more than just a matter of affordability. Indeed, groups that have historically been marginalized or shut out of the system may be apprehensive about opting in, and the FDIC survey bears this out: 11% of Black, 9% of Hispanic and 7% of American Indian or Alaska Native households are unbanked, compared with 2% of white households.

About 54% of unbanked households are not interested in opening a bank account at all.

What this means is that efforts to reduce the number of people without bank accounts by appealing only to dollars and cents may not be responsive to what’s actually driving these consumers. People may make the informed choice to go without a bank independent of financial need. In this case, understanding the available options and making the most cost-effective choices can ease the added burden.

Estimating the costs and how to minimize them

Going without a bank account requires someone to buy their financial services elsewhere, often choosing these service providers piecemeal, which can be costly. Just how costly is notoriously difficult to measure. An unbanked individual can budget the monthly expenses of financial transactions based on frequency of use. But the fees associated with these services and how often they’re used vary greatly from person to person. Although the total economic cost of being unbanked is useful to know for policymakers, banks and community organizations alike, adding them up with any level of precision is potentially impossible. However, we can conceptualize the costs by providing a conservative estimate.

I looked at the three most common financial services people without banks are likely paying for and calculated estimates for how those costs could add up across the entire population for one year. I assumed these consumers were optimizing for their situations — seeking lower cost services where possible to avoid overpaying. In other words, these numbers are purposefully tamped down.

For more details on the assumptions in this analysis, see the methodology notes.

$125 million on check-cashing services

Nonbank check cashing is used by 22% of unbanked households, according to the FDIC survey. But how much someone pays for this service depends on how often they need to use it and how much money they’re converting to cash.

Households without bank accounts have several options when they need to cash a check: taking it to the issuing bank, a standalone check-cashing business or a retailer that offers the service, like Walmart or a grocery store. These service providers may charge a flat fee or a percentage of the check amount. Some may charge as much as 10%.

We assume our unbanked customer chooses a lower-cost option and cashes two checks a month for $4 each. At this rate, they’re potentially spending $96 per year they wouldn’t need to if they had a traditional bank account, enough to start an emergency fund. At that rate, unbanked households could be spending a collective $125 million per year.

Managing the costs: Retailers are generally the lowest cost options when it comes to cashing checks. But in a pinch, you might have to accept the added cost of a check-cashing business. For example, if you need to cash your paycheck to buy gas and have a check-cashing business within walking distance, you may pay the higher cost of getting your paycheck cashed nearby.

When possible, time your check cashing with your weekly or biweekly grocery shopping, assuming you have a grocery store with fairly low rates. This way, you don’t have to make an extra trip, and those higher cost (but perhaps more convenient) methods are saved for special circumstances.

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$46 million on nonbank money orders

About one-third (32%) of unbanked households use nonbank money orders, the FDIC survey found. This service isn’t unique to people without bank accounts — 9% of banked people use them, too. But, in my experience as a longtime account holder, the need for money orders when you have a checkbook are few and far between. Unbanked individuals are likely using money orders in place of checks and, to some extent, debit cards — 92% say they use them to pay bills.

Money orders aren’t too pricey, and they’re less expensive from a nonbank than a bank, generally speaking. But if the 32% of unbanked households are getting just two nonbank money orders each month to pay bills, they could be collectively spending around $46 million in a year.

Managing the costs: Many grocery stores and Walmart offer $1 money orders. You may be able to cash your paycheck and buy your money orders in the same location, saving yourself some gas and the inconvenience of additional errands. The U.S. Postal Service is likely the next best option, offering orders for $1.75 for those $500 or less and $2.40 for those between $500 and $1,000.

$59 million on prepaid debit card fees

One-third of unbanked households use prepaid cards. Bill paying is the most common reason for their use (78%), but making purchases in person is a close second (76%), according to the FDIC survey. These cards often function just like traditional debit cards when you use them on transactions, but they can come with charges for “loading” cash onto them, plus monthly fees and ATM fees. These, of course, vary considerably.

If someone uses a prepaid debit card regularly, they’re likely to seek a low-cost card. So, we assumed one type of fee levied once per month — a single $2.50 ATM fee for accessing an out-of-network cash machine. When applied to the many unbanked households using this service, this single fee could equate to $59 million each year. A less conservative (but far from excessive) estimate — adding a monthly account fee — would bring that total to more like $176 million.

Managing the costs: Minimize prepaid card expenses by choosing a card that doesn’t levy fees everywhere you turn. Read the fine print when you buy one; card issuers are required to print these details on their websites and on the back of the card packaging. Look at whether they charge a monthly fee, how you can reload the card and what costs are involved, and the availability of fee-free ATM withdrawals.

What this $230 million total misses

There are many other costs associated with not having a bank account: 18% of unbanked households use online payment services such as Venmo or Cash App, 16% use money transfer services such as Western Union or MoneyGram, and 5% use nonbank transfers to send money outside the U.S. or to receive funds, according to the FDIC data.

And being unbanked has indirect costs.

Banks and credit unions protect your money in ways cash and nonbank service providers can’t. These ways include providing interest-bearing accounts to partially offset the effects of inflation, FDIC insurance to protect your deposits and fraud protections in instances of lost or stolen debit cards, for example. They also provide access to credit, providing a path to establishing a credit history to qualify you for lower rate loans and credit cards.

Community development financial institutions, or CDFIs, are a good choice for people who want a bank account but struggle with fees or a lack of credit history. Neobanks, or accounts from financial technology companies, may be a good compromise for people who are concerned about trusting traditional banks. These accounts offer some of the perks of a bank without the “tradition.”

For those who wish to remain entirely outside the financial system, comparing services, reading the fine print and being strategic can minimize the potential additional cost burden.

METHODOLOGY NOTES

Check-cashing calculations: Many check-cashing services charge fees as a percentage of the check amount, such as 1%. Others, like Walmart, charge a flat rate based on the check amount — $4 for any preprinted check $1,000 or less and $8 for any preprinted check over $1,000 up to $5,000, for example. For this calculation, we assumed the consumer would opt for the lower-cost option, which is most likely to be the flat-rate fee. Conservatively, we assumed two checks per month of less than $1,000 each for this calculation.

Money-order calculations: The cost of a money order varies by location — some banks charge about $5. Post office money orders are more affordable, at $1.75 for orders up to $500 and $2.40 for those $500 to $1,000. Retailers including Walmart and some grocery chains offer money orders for $1. Knowing the primary reason for using money orders among the unbanked is paying bills, we assumed two of the most affordable money orders per month, for a total cost of $2.

Prepaid debit card calculations: Many prepaid debit cards charge a $2.50 ATM fee for using ATMs outside their network, not including the fee that an ATM operator may charge. While some have vast networks, we assumed a single visit per month to a nonassociated machine. Convenience can outweigh costs, and using a cash machine is usually about accessing your money conveniently — it doesn’t always make sense and isn’t always possible to track down a specific ATM. Some prepaid cards require a minimum average balance or direct deposit to waive a default monthly fee, in the $5 range. For the “less conservative” estimate, we assumed this $5 monthly fee.

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