In today’s world, we assume everybody has a bank account. We use them to collect our monthly pay, to fund purchases, pay the bills, and save for important items. But not everyone is fortunate enough to open a bank account, let alone make use of the wonderful features on offer.
So why and how do people become unbanked or underbanked? In this handy blog, we’ll uncover 5 common reasons, as well as distinguish the difference between the unbanked and underbanked.
Keep reading to learn more!
Unbanked VS Underbanked: What’s the Difference?
Despite sounding similar, unbanked and underbanked are not the same thing. So, before we jump into the rest of this blog, let’s distinguish the difference.
If a person is unbanked, they have zero access to traditional services offered by banks or similar organisations. This includes credit or debit cards, savings accounts, and more.
If a person is underbanked, they typically have a bank account, but manage their money in alternative ways compared to those earning a similar income. For example, they may use banking services such as payday loans or cheque cashing shops.
5 Reasons Why People Are Unbanked or Underbanked
Before we dive deeper into this topic, it’s important to note that often people have a choice. Individuals don’t always become unbanked or underbanked because of unforeseen circumstances. Perhaps controversially, some people simply choose to manage their money in alternative ways.
1. Lack of Trust in the Banking System
Many individuals who are unbanked or underbanked may not be so by force, but could have opted into it instead. In the UK, lots of people do not trust our banks to work in their best interest. Perhaps this is because of a lack of transparencies regarding fees and lengthy processing times for deposits.
In fact, in October 2021, the Daily Mail revealed that a third of people aged 25-34 prefer to keep their money at home instead of a bank account. These individuals believe banks make money from hidden charges. Therefore, the only option is to manage their cash via other avenues, whereby they feel more in control.
2. Bad Credit History
When you open a new bank account, banks will run checks on your credit report and credit score for a couple of reasons:
- To confirm your identity
- To assess the risk of having you as a customer
Collecting details about your financial past is vital to ensure they’re taking on a trustworthy customer. They’ll want to gather information about your past credit, your spending habits and any loans you have. This gives them a good idea about whether you’re likely to pay back any loans, including the “loan” involved when you go into overdraft.
Unfortunately, if you have a poor credit history, there’s a good chance you’ll be rejected by mainstream banks and become unbanked. For example, this may be the case if you have a history of bankruptcy, fraud, or CCJs.
However, there are some options available for individuals with poor credit history. Many banks offer a Basic Bank Account, designed to help get you back on your feet. Although you typically cannot go into overdraft and may have additional charges for unpaid direct debits, these accounts offer great advantages, such as:
- Opening with zero money in the account
- No hidden fees
- Withdrawal of money from cash machines
3. No Proof of UK Address
Almost all bank accounts require proof of address before they’ll allow you to open an account. In most cases, this must be proven with a utility bill, a tax bill, or another legal document with your name and address clearly written.
Those who’ve been living abroad typically face this issue on return to the UK. However, these individuals are still eligible to open a Basic Bank Account as detailed above. Plus, high-tech digital banks such as Monzo make it super easy to open an account without providing proof of address.
Many popular banks in the UK only accept customers earning a certain amount of money every month. But this doesn’t mean the unemployed aren’t entitled to have a bank account. These individuals can open a Basic Bank Account or register with a digital bank, though they may find the benefits are few and far between, given their lack of income.
However, because so many people are not well educated in the UK’s banking services, the unemployed often become unbanked instead.
5. Too Many Costs and Charges
In the UK, you wouldn’t normally be charged monthly or annually to have a general bank account. But they’ll definitely find other ways to get a little extra money from you. Hence, many people are unbanked or underbanked to avoid this issue altogether.
Here are some examples of ways in which your bank may spike you with additional fees:
- ATM Fees
○ With bog-standard hole-in-the-wall ATMs in the UK, you’ll pay zero charges when using a debit card. However, if you were to use a credit card, you can expect to pay a baseline fee plus interest.
○ Standalone ATMs in small shops, clubs or bars will always charge you a fee on top of the money you’re withdrawing, whether using a debit or credit card.
- Overdraft Fees
○ Many banks have a free overdraft policy, meaning you can go below £0 and not be charged. However, if your chosen bank doesn’t offer this handy advantage, you’ll either receive an arranged or an unarranged overdraft fee. Let’s break these terms down:
■ Arranged – The fee provided with permission from your bank to go into your overdraft.
■ Unarranged – The fee provided without permission from your bank to go into your overdraft.
- Overseas Payment Fees
○ When sending money abroad, you’ll have to pay a fee. However, the exact amount depends on your bank provider and how much money you wish to send.
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