11© paysafecard, Shutterstock

Why a large portion of the U.S. population is underbanked – and what that means for prepaid

Every two years the Federal Deposit Insurance Corporation (FDIC) in the U.S. releases the results from their „National Survey of Unbanked and Underbanked Households“. With staggering results: Over a quarter of the American population doesn't use credit/debit cards or even have a bank account.

The FDIC first conducted the survey in 2009. It measures the share of households that are unbanked, meaning no one in the household has a bank account. It also examines the extent to which households with a bank account look outside the banking system to meet transaction or credit needs.

In the latest report (2015) the unbanked rate was 7.0%. Although this rate fell slightly from 7.7% in 2013 the number of "underbanked" households, which have a bank account but still elect to use services like prepaid cards, check cashing, money transfers or payday loans has remained constant with 19.9% (20% in 2013). Taken together, 27.0% of households in the U.S. today are unbanked or underbanked. So it is clear that even though the unbanked rate has declined, many U.S. households remain underserved by mainstream financial institutions.

The high cost of maintaining a bank account and an overall lack of trust in banks has discouraged many lower-income households and young millennials from opening an account, the report found. These consumer groups are less likely to use traditional banking methods than ever before, leading to a rise in unbanked and underbanked individuals. Instead, they prefer conveniences like electronic payments, mobile banking and prepaid services.

As a result, many unbanked and underbanked consumers turned to prepaid cards to serve their financial needs. Here are some findings from the report:

• Between 2013 and 2015, the proportion of households that used a prepaid card in the past 12 months increased from 7.9% to 9.8%. This growth occurred broadly across socioeconomic and demographic groups.

• Consistent with results from the 2013 survey, prepaid card use in 2015 was higher among lower-income households, less-educated households, younger households, black households, and working-age disabled households.

• Households with income that varied somewhat or a lot from month to month were more likely to use prepaid cards in 2015 (13.5% and 15.5%, respectively) than households with income that was about the same each month (9.2%). This pattern held for households of all income levels.

• Use of prepaid cards was most prevalent among unbanked households. An estimated 27.1% of unbanked households used a prepaid card in 2015, compared to 15.4% of underbanked households and 6.9% of fully banked households.

• Households that used prepaid cards obtained the cards from a variety of sources. The most common source was a store or website that is not a bank (42.6% of households that used prepaid cards obtained cards from this source), followed by a bank location or a bank’s website (17.3%).

These results strongly suggest that consumer attitudes toward prepaid cards are changing. The cards themselves are more widely used and advertised, and individuals find them more advantageous and accessible than a traditional checking account.

You can download the report here.

For more interesting insights by FDIC-Chairman Martin J. Gruenberg go to the FDIC website.