Un- Banked Essay

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In this entry, unbanked is defined as someone who does not have any bank account in any formal financial  institution. People with  access to financial services vary across countries.  Several factors such as ethnicity,  education level, access to financial resources,  and so on influence an individual’s decision to access financial services. This entry examines  the  characteristics of the  unbanked as well as the policies and business models that  have been used to alleviate this problem.

Unbanked  In Developed Countries

The  financial  sectors  of  developed  countries  are well advanced  and  provide  various  financial  services to  their  customers. Yet  a  large  number   of the population in developed countries  remain unbanked. A  survey  conducted  by  the  Federal Deposit  Insurance  Corporation in 2011  provided in-depth  information about  those  who do not use the traditional financial services offered by financial institutions. The survey also presented  alternative types  of financial  services that  are  used  by these people. The survey found that almost 12 million households—about 8.2 percent of U.S. households—do  not have access to a bank  account. The survey also revealed that minority groups are unbanked more  often  than  the  majority  community. In addition to minority  groups, origin of birth also seems to be a factor  for opening  or accessing a  bank  account. Una  Okonkwo Osili  and  Anna Paulson  studied  the influence  of immigration status  on  the  use  of  financial   services.  The  study found  that  immigrants who  have  either  recently arrived  or have been living in the United States for several years are less likely to have bank  accounts and other financial assets than native-born Americans.  Age and  employment   status  are  also factors  for  being  involved  in  banking   relations. Young people are less likely to have a bank account because they are more likely to depend on parents or  to  have  no  permanent job.  Also,  individuals who do not have a permanent full-time job are not likely to have bank  accounts.

A similar  study  was conducted by MasterCard in western Europe. It found that  93 million people in six European countries  do not have access to a bank  account. The  six  countries  included  in  the study   were  the  United   Kingdom,   France,  Italy, Spain, Poland,  and  Russia.  Unbanked individuals in these countries  tend to be younger, from minority communities, female, unmarried, unemployed, or unwilling  to take  financial  risk. Other  reasons for not having a bank  account  include consumers’ dislike  of  dealing  with  banks,   their  distrust   of banks, and the costs associated with bank accounts.

Unbanked  In Developing And Emerging  Countries

The financial services sectors in the majority of developing  and emerging countries  are not as well developed  as  those  in  developed  countries,   and many  of these financial  institutions are located  in urban  areas. Both of these factors contribute to the unbanked problem  in developing  countries.  A less developed  financial  sector  is not  able  to  offer  as many  financial  services  as  a  developed  financial sector is able to. The infrastructure is also not well developed in many of these developing and emerging  countries.   Individuals   living  in  a  rural  area with  limited  access  to  roads  and  transportation have limited access to financial institutions located in  the  urban   areas.  Therefore,   the  majority   of people living in the rural areas of developing countries do not have access to a bank  account.

Institutions and cultures are also important factors for consumers  in developing  countries. A gender gap is prevalent  in many of the developing and emerging   countries.   Even  the   established   laws often  discriminate   against  women.  For  example, the International Finance  Corporation and World Bank  found  that  laws  can  prohibit women  from entering into a contract or opening a bank account under  their own name; often, they are required  to have a male cosigner.

Alternative Sources And Policy  Implications

Individuals living in developed countries versus developing   countries   have   different   needs   and wants as well as different degrees of access to modern  infrastructure. Both  of  these  groups  require different  strategies  by corporations to  meet  their needs.

Individuals  in developed  countries  who  do not want  to be involved in the formal  financial  sector find alternative financial services to meet their financial  needs. Alternative  financial  service providers include  check cashers,  payday  lenders,  and pawn  lenders. Check cashers charge their customers a  fee. To  avoid  paying  this  fee, many  of the unbanked use grocery stores to cash their checks.

Prepaid  cards have attracted attention from the unbanked over the years. These prepaid  cards can be loaded  easily and  can  be used  like any  other card   in  brick-and-mortar  stores,   as  well  as  in online stores.

Policy makers have been interested  in increasing consumers’  access to  financial  services. Over  the years, various  measures  have been taken  by both the  U.S. government and  financial  institutions to facilitate  the process. For instance,  electronic  fund transfer   initiatives   and  the  Go  Direct  Program (2010) required some of the federal payments to be made electronically, which pushed some of the unbanked  individuals   to   either   open   a   bank account  or adapt  to some form  of electronic  payments, such as a prepaid  debit card.

Microfinance has been an alternative source  of finance for people who are credit constrained and have  limited  or no  access to formal  financial  services in developing countries. A well-known case of microfinance is Grameen  Bank, founded  in Bangladesh, where a significant portion of the population live in poverty. Given that  this population has limited access to assets that can be used as collateral,  Grameen  Bank uses group  lending  systems to reduce risk. Grameen  Bank provides  loans to  the  individuals  in the  group,  but  the  group  is responsible  for supporting each member. In case of default,  members  are  denied  a  subsequent loan. Even though  defaults happen, the repayment rate is good for many of these microfinance borrowers.

Globalization has  integrated the  financial  sectors  across  countries  and  increased  capital  mobility. Despite the increased  integration, many people remain  excluded  from  many  of these services for various reasons. However, some businesses are trying to be more inclusive. All of the alternative financial  services mentioned above serve people at the bottom of the pyramid,  as suggested  by C. K. Prahalad. Alternative  financial services are helping societies  to  become  more  inclusive  and  to  raise living standards.


  1. Armendáriz, Beatriz and Jonathan Morduch. The Economics of Microfinance. Cambridge: MIT Press, 2010.
  2. Barr, Michael S., Jane K. Dokko, and Benjamin J. Keys. And  Banking  for All? Finance and Economics Discussion  Series Working  Paper No. 2009-34. Washington, DC: Board of Governors  of the Federal Reserve System, August 2009.
  3. Federal Deposit Insurance  “2011 National Survey of Unbanked and Underbanked Households” (September 2012). https://www.fdic.gov/ householdsurvey/2012_unbankedreport_execsumm. pdf (Accessed September  2014).
  4. Go Direct. “U.S. Treasury Requires  Electronic  Federal Reserve Payments.” www.godirect.giv/gpw/index.gd (Accessed September  2014).
  5. Hogarth, Jeanne M. and Kevin H. O’Donnell. “Banking Relationships of Lower-Income Families and the Governmental Trend Toward Electronic ” Federal Reserve Bulletin,  v.87 (1999).
  6. International Finance Corporation. Strengthening Access to Finance for Women-Owned SMEs in Developing Countries. Washington, DC: World Bank, 2011.
  7. Prepaid Cards and Products in 2012: Enabling Financial Access for Underbanked and Gen Y Consumers. Pleasanton, CA: Javelin Strategy and Research, 2012.
  8. “Road to Inclusion: A Look at the Financially Underserved  and Excluded Across Europe.” White paper  (September 16, 2013). http://newsroom.mastercard.com/wp-content/uploads/2013/09/ IpsosMORI_MasterCard-Underserved-Research_ White-Paper.pdf (Accessed September  2014).
  9. Osili, Una Okonkwo and Anna Paulson. ImmigrantNative Differences  in Financial Market  Chicago:  Federal Reserve Bank of Chicago,  2006. http://www.chicagofed.org/digital_assets/publications/ working_papers/2004/wp2004_18.pdf (Accessed September  2014).
  10. Prahalad, C. Krishnarao. The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Rev. and updated 5th anniversary ed. Philadelphia, PA: Wharton School Publishing, 2009.
  11. World World  Development Report  2012: Gender Equality  and Development. Washington, DC: World Bank, 2012.

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