Providing Banking for the Unbanked: Practical Advice and Strategies

In a time when digital payments and online accounts dominate the financial landscape, it may be surprising to learn that millions of Americans still live outside the traditional banking system – often at great personal cost. For community banks, implementing strategies to effectively reach these market segments is an opportunity to strengthen local economies, build lasting customer relationships, and meet mission-centric organizational goals. By serving its own community well with the tools already at its disposal, financial institutions can keep their business at home and out of the hands of competitors. 

PRI Head of Client Engagement Brett Rawls says that it’s key for a community bank’s independence and long-term stability to focus on all their constituents and to find creative ways to reach them, which can include finding non-bank partners.

“If you’re a community bank, your focus is on the betterment of the community,” Rawls said. “Your local presence depends on your ability to enhance your growth over time, and tapping into markets that are not being served by you – but could be – represents an opportunity to do that.”  

According to the FDIC’s 2023 survey, 4.2% of U.S. households representing  about 5.6 million people are “unbanked” with no access to a checking, savings or money-market deposit account at an insured bank or credit union. While that is the lowest level since tracking began, it’s still a significant barrier to long-term financial security for many people. In addition, the FDIC reports an “underbanked” share of households (they have a bank account but still rely heavily on alternative financial services) of about 14.2% or 19 million households.

For these individuals and families, the reasons they are unbanked or underbanked go beyond simply “not having enough money” and include documentation hurdles, distrust of institutions, language barriers and high fees. The result? A reliance on costly alternatives like check-cashing stores, payday lenders and money orders, along with missed opportunities for savings, credit-building and long-term planning.

Why Are People Unbanked or Underbanked?

While the number one reason given in the FDIC 2023 survey was “Don’t have enough money to meet minimum balance requirements,” the second was distrust of financial institutions or systems. Low-income adults are much more likely to be unbanked. Numbers from the Federal Reserve show that around a quarter of adults with income under $25,000 were unbanked versus approximately just 1% of adults with income over $100,000. In addition, while 82% of adults have a credit card in 2023 (and nearly all adults with incomes over $100,000), less than half with incomes lower than $25,000 have them.

Additional factors leading to being unbanked include:

• Lack of required documentation (e.g., ID, proof of address)
• Feelings of unworthiness or intimidation
• Language barriers or cultural disconnects
• Lack of awareness of digital or remote banking options
• Fees such as overdraft and monthly maintenance fees
• Privacy/surveillance concerns

There are also wide disparities in the demographics of the unbanked, according to the FDIC.

• Black households: 10.6% unbanked
• Hispanic households: 9.5%
• American Indian or Alaska Native households: 12.2%
• White households: 1.9%

Risks and Downsides for the Unbanked

While there are options available for the unbanked to conduct their financial business, they are often more expensive, less convenient and safe and deprive them of resources for long-term financial planning or larger purchases.

Some risks and downsides include:

• Reliance on high-cost alternatives. Check-cashing services, payday loans and money orders frequently come with steep fees and inflated interest rates.
• Cash-only vulnerability. The FDIC reports that 66.2% of unbanked households use only cash, while 33.8% rely on prepaid cards or non-bank digital services like PayPal, Venmo, or Cash App. This not only opens the customer to a greater risk of having their money lost or stolen, but it can also deprive them of the ability to earn interest or build credit.
• Financial insecurity. According to the FDIC, underbanked households utilize buy-risky now-pay-later (BNPL) or crypto at a higher rate than other groups. The underbanked are less likely to have a credit card and more likely to have higher late payment rates.
• Limited long-term planning. Without access to traditional banking, these households often miss out on key services such as savings accounts, credit-building, financial advice and loans at reasonable rates.

Opportunities for Community Banks

Community banks are well positioned to address the unbanked and underbanked as a “niche” market. The recent PRI article The Rise of Niche Banking: What Can Your Bank Learn from the Specialists? points out that niche banking focuses on specialized market segments by delivering highly tailored services that traditional banks often overlook. Unlike the broad, one-size-fits-all approach of legacy institutions, niche banks develop deep expertise in the unique needs of their chosen communities, which dovetails well with the stated missions of community banks to serve their customers right where they are.

According to Rawls, community banks that target the unbanked and underbanked market segment can:

• Be a local, trusted alternative. Their local focus allows deeper knowledge of – and investment in – the community.
• Build loyalty and trust. By aligning with local needs and values, community banks can differentiate from larger, more impersonal institutions.
• Enhance regulatory compliance. Serving underbanked customers can help fulfill the Community Reinvestment Act (CRA[BR2] ) requirements and other inclusion goals. Partnering with Community Development Financial Institutions (CDFIs) can mitigate risk while expanding reach.
• Grow customer base and revenues. Onboarding new customers provides cross-selling opportunities (deposit growth, small business lending, multilingual services). Being a resource for and educating customers can foster multigenerational relationships.

Chuck Leach, President of Lee Bank, saw the potential opportunities in his town of Lee, Mass. and had a hunch that his institution had more to offer the unbanked and underbanked than they were being given credit for.

Berkshire County, where Lee Bank is situated, has one of the highest number of nonprofits per capita in the Northeast, and many of them serve the same communities that contain a large number of unbanked people. Leach set up personal interviews with representatives from every nonprofit in town, and he asked what their communities needed. He listened, went back to the bank to create new products and followed up afterward.

“You can’t just tell people to trust you,” Leach said. “Your actions count more. We started tearing down the walls, making it more comfortable for people to approach us. When you begin building a circle of trust with intentionality and make it multigenerational, you are serving a potential lifetime customer.”

Lee Bank has made reaching unbanked and underbanked populations part of their strategic mission in the community. The Bank now offers new products and services specific to the segment, such as microloans to address first and last month’s rent, small business loans up to $5,000, translation services, a bilingual point of contact and video banking to increase accessibility.

Building Customer Relationships that Last

Rawls said reaching the unbanked and underbanked segment of the community is a good fit for the personal service, innovation and local investment that community banks are known for. He recommends a few best practices including:

• Embed inclusion in bank strategy. Make addressing underbanked populations a deliberate part of your mission, as Lee Bank has done.
• Develop targeted programs. Initiatives such as bilingual staff, mobile units, video banking and education outreach help overcome barriers like language and accessibility. Remember that cultural awareness is key. Listen closely to the needs and preferences of your potential customers.
• Partner with CDFIs and nonprofits. Community Development Financial Institutions (CDFIs) are mission-driven to meet the needs of the economically disadvantaged people in the community, and many can offer complementary services without competition. CDFIs, both banks and nonbanks, are backed by the US Treasury. Nonprofit CDFIs can partner with a community bank to provide certain types of loans with mitigated risk, and they may be a potential partner for events such as financial literacy programs. Examples of nonprofit CDFIs include BrightBridge Capital (TN), CLIMB Fund (SC) and Renaissance Community Loan Fund (AL/MS).
• Leverage regulatory support. Federal agencies, including the FDIC, support outreach efforts like the #GetBanked movement.

Rawls said that investing in reaching the unbanked and underbanked population has benefits for both community banks and their current and potential customers and partners.

“Taking care of your community and earning their trust not only tends to keep the bigger, non-local competitors out, it’s always a benefit to provide your local people with the tools and resources that promote their safety, financial security and peace of mind,” Rawls said. “Expanding your reach and impact deep into the community makes everyone better and more secure in the long run.”

About our experts

Brett Rawls brings extensive leadership experience in high-growth financial services organizations, with a track record of driving key strategic initiatives, overseeing business operations, improving bottom line and facilitating change. He has been active for the last 27 years in the financial services industry, having spent time at The Federal Reserve Bank, multiple correspondent and commercial bank environments, and consulting in the industry. As a correspondent banker, Brett has worked directly with over a thousand community financial institutions over the last ten years. Additionally, he has established and led Treasury Management and SBA departments; multiple specialty units, including cannabis-related banking, national deposits and loan participation/syndication desks; and helped create and become the first Chief Administrative Officer for a now-$60 billion plus southeastern-based bank.

Resources:

The Rise of Niche Banking: What Can Your Bank Learn from the Specialists? – PRI

2023 FDIC National Survey of Unbanked and Underbanked Households – FDIC

Federal Reserve Board Publication – Federal Reserve

Fed survey: Unbanked status continues to vary among income, ethnic groups – ABA Banking Journal

The Power of Financial Institution and CDFI Partnerships – CRA Today – CRA Today

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