World’s Unbanked - California to Bangladesh

Published in

Game of Life

12 min readMar 30, 2018

“Unbanked” vs “Underbanked”, What’s the difference?

•Unbanked: Adults without a bank account; those that must or choose to use alternative financial services. Typically do not have insurance, pensions or any other type of professional money services.

~2 Billion people considered Unbanked in the World

•Underbanked: Adults who have a savings or a checking account at a financial institution but still rely on alternative financial services like check-cashing services, money orders, payday loans and pawn shops.

~3 Billion people considered Underbanked in the World

The unbanked of the world

The unbanked population of the world in 2014 was 2 billion adults. It was 20% more in 2011, indicating the progress being achieved. From 2011 to 2014, the percentage of adults with an account at a mobile money service provider or a financial institution grew from 51 to 62 %, according to the World’s Bank 2014 Global Findex report.

According to the World Bank’s Global Financial Inclusion database, (shown on the graph below) a majority of adults in The Organisation for Economic Co-operation and Development (OECD) high income countries had a bank account in 2015, compared to only 54% of those in developing countries and 14% of those in the Middle East.

Yim Yong Kim, the president at the World Bank said:

“Access to financial services can serve as a bridge out of poverty…Now we have evidence that we’re making major progress… This effort will require many partners — credit card companies, banks, microcredit institutions, the United Nations, foundations, and community leaders. But we can do it, and the payoff will be millions of people lifted out of poverty,”

Here is a map with countries that have more than 85% of unbanked (Chad, Turkmenistan, Pakistan, Egypt, Central African Republic, Yemen, Niger, Guinea, Burundi, Madagascar, Afghanistan, Iraq, Tajikistan, Cameroon, Djibouti, Burkina Faso). Note: Bangladesh 163M population has an estimated 80% or 130M unbanked.

Trending Cryptocurrency Hub Articles:

1. Blockchain for Dummies in 4 minutes
2. Introduction to Cryptocurrencies: Dogecoin, the Most Bizarre Coin in the Cryptocurrency World
3. Google Enters The Blockchain Sector Through A Partnership
4. Blockchain use case: Trade Finance

The U.S. Situation

According to the Federal Deposit Insurance Corporation (FDIC), in 2013, 27.7% of all U.S. households were unbanked or underbanked. The situation is worse among the households earning less than $30,000 per year (42.8%), Hispanic households (46.5%), African-American households (53.7%) and the households that were headed by a workin-age individual with a disability (46.4%).

The situation is a bit better according to the 2015 FDIC Survey of Unbanked and Underbanked Households that found that:

7% of US households were unbanked in 2015 which represents around 9 million US households or around 23.2 million people (15.6 million adults and 7.6 million children)
19.9% were underbanked in 2015, which represents approximately 24.5 million US households or 67.4 million people (51.1 million adults and 16.3 million children).

The percentage of unbanked households is lower than in any of the prior surveys. An interesting finding is that 55.8% of unbanked households believed that banks weren’t interested in serving households like theirs. Furthermore, the use of online and mobile banking to access accounts increased whilst the use of bank tellers decreased.

Online banking use increased from 55.1% in 2013 to 60.4% in 2015 (for banked households) and use of mobile banking increased from 23.2% to 31.9%. The use of bank tellers particularly decreased among lower-income households, less-educated ones, older households and those located in rural areas.

The use of prepaid cards increased from 7.9 to 9.8% and was most prevalent among unbanked households. In 2015, 27.1% unbanked, 15.4% of underbanked and 6.9% of banked households used prepaid cards.

According to the report, 20.2% of unbanked households saved, compared to 55.2% of underbanked and 60% of banked households. Unbanked saved in the home, with family and friends, and prepaid cards. It should also be said that households with volatile income have higher unbanked and underbanked rates.

Most of the unbanked households went outside of the banking system in order to pay bills and receive income, and 62.3% of unbanked paid bills with cash whilst 35.5% used non-bank money orders. Unbanked received their income via paper check or money order (42.1%) and in cash (22.8%). As for the underbanked households, 92.7% paid bills using a bank and the most prevalent method of receiving income was a direct deposit into a bank account (82%).

A brief summary:

1/5 unbanked households earn less than $30,000 annually
1/5 African-American households are unbanked
1/3 African-American households are underbanked
1/6 households headed by a working-age disabled adult were unbanked
3/4 teens between ages 15-17 were unbanked
5/10 adults between ages 18-20 were unbanked

Common reasons were high fees and costs related to maintaining a retail bank account. Furthermore, a number of people stated that the minimum balance requirements at retail financial institution were hard to maintain in case of unemployment and underemployment. Furthermore, there is a great decline in branch closings that occur in low-income communities and immigrants have language barriers when interacting with bank employees, reading the literature of the bank and whilst using ATM machines. A distrust towards retail banks is also present.

The California Situation

California’s unbanked dropped from 8% in 2013 to 6.2% of households in 2015. In 2005, the city of San Francisco did a study that showed that the number of unbanked households is around 50,000. This meant that 1 out of 5 San Francisco adults didn’t have a bank account, and almost half of the city’s African-American and Latino residents.

A reported 2 -5% of the unbanked’s monthly income was spent on cashing paychecks.

To illustrate a point, let’s do a couple of real-life examples. In 1992, Barbara O’Leary Hatfield Liberace’s husband died. At the moment he died, her monthly income went from $5,000 to less than $500. Soon, she was unable to maintain the required minimum balance and the bank closed her account. Barbara had to rely on payday loans to make her mortgage payments and soon, she became homeless.

Virginia Johnson was seventy-two and she was living on a fixed income with her disabled grandson. She spent almost $200 every month in order to cash her security checks and purchase money orders to pay her bills. She used a check-cashing outlet because she didn’t qualify for a traditional bank account and every month walked home with large amounts of cash.

These are not uncommon stories. The lack of bank account access for low and moderate income households represents a big problem. A person earning $20,000 a year after taxes has to pay around $400 (2%) per year in check-cashing fees. This further pushes the border-line income households to poverty.

In December 2005, a new program emerged, Bank On San Francisco and in December 2008, the Bank On California program started.

Bank On California is a voluntary initiative that provides access to mainstream financial products and services to the unbanked households. These products and services include low-cost and even free checking and savings accounts and access to free financial education opportunities. So far, over 300,000 starter bank accounts have been opened.

California didn’t stop there. They also approached another major unbanked issue — payday loans. For the unbanked and those without a credit score, payday loans can be the only way to pay a hospital bill or similar expenses. They are very expensive and most of them are not reported to the credit bureaus, meaning loaners don’t receive the benefit of improved credit scores over time, they just sink further into debt. In 2010, California’s Legislature started a pilot program for small dollar loans. Six lenders and six finders participated and it showed great results:

Borrower application increased from 207,092 in 2011 to 328,198 in 2014. The loan approval rate increased from 39 to 50% in 2014.
The annual total principal of loans increased from $97.9 million in 2011 to $179.9 million in 2014.
Small loans ranged from $300 to $499 fell by $42.3 and loans in the highest range from 1,500-$2,499 increased by 10%.
In 2014, 45% of borrowers used the loans to build or repair credit and 77% said that the length of the loan was long enough to let them make loan payments without any issues.

In order to resolve the unbanked issue, lower not higher fees need to be available for them. Microlending and a decentralized blockchain solution just might be the answer. California took the initial steps towards solving the unbanked issue but there is still much work to be done.

Some countries are going cashless, some stores are already cashless — products and services can only be purchased via credit card or bank account. This further limits the unbanked and lowers their possibilities. Their low credit scores are not allowing them to make any progress and the payday loans and check cashing are imposing high fees on their already small incomes.

If we look at the demographics of San Francisco that has 15.1% of Latino households and 6.1% of African-American households and yet roughly 50% of each of these groups are unbanked households. It is the minorities that are suffering the most and yet the percentage is perceived as small.

In Los Angeles, 500,000 people don’t have access to a bank or a credit union in their neighborhoods. This means that they can’t easily pay a check, or take a loan. A survey by FDIC (Federal Deposit Insurance Corporation) has shown that 57% of unbanked said that they don’t have enough money to keep in an account, 11% were distrustful of banks, and 10% said that the bank fees are simply too high. But what does this mean for the unbanked, being unbanked?

It means no savings account, no possibility for an affordable loan to purchase a house or a car, and so on. The unbanked have to resort to other means of loans which further pushes them quickly into debt. It gets even harder for low-income people in Los Angeles county.

Think about an average person in Green Meadows that earns around $33,000 per year, deduct taxes, and he/she will earn approximately $27,000 per year which is slightly above $2,000 per month. Average rent in Green Meadows is around $1,080 which only leaves around $920 a month to cover other expenses like transportation, food, healthcare, education and similar.

Furthermore, since Green Meadows is one of the neighborhoods without a bank or a credit union, this person will have to spend around $750 yearly to cash checks with a 2.75% fee. If this person was to invest $750 yearly into a retirement account with a 7% annual return, in 40 years, he/she would have around $200,000. It is expensive to be poor!

Approximately one in five neighborhoods in Los Angeles doesn’t have a bank or a credit union which means that around 46 neighborhoods or 600,000 people are pretty much forced to use check cashing and similar things. The lack of financial institutions in directly linked with higher-poverty rates. From five most populous neighborhoods with a lack of a financial institution, 4 are located in South Los Angeles and have significantly lower median incomes that the median County of $56,196. These four neighborhoods have a median of $32,295 and are mostly Latino and African-American populated.

The exclusion of the neighborhoods from financial institutions is certainly not a way to resolve the unbanked issue or help them increase their incomes and save for a brighter future. People from these areas are often a victim of redlining, which is when a bank refuses a loan to a person based on the area where they live. Although redlining was outlawed in 1968, it still has a large impact on the past redlined areas. Metaphorically, it was never truly outlawed since these areas are still low-income with no financial institutions; they are not able to push forward.

An Old Map of Los Angeles with Redlined Areas

South East Asia

% of World’s Population with no formal financial services

Bangladesh is a predominantly rural country and therefore, have issues related to a high number of unbanked households and poverty rates.

Since 2010, Bangladesh made a giant step-up with Mobile Financial Services (MFS) and it has been estimated that 22% of Bangladeshi adults are using mobile money. However, these still remain as mostly a domestic person-to-person transfers. According to one study, it was shown that 85% of mobile money users don’t have an account and only 20% have a bank account, which leaves a staggering 80% as unbanked and only 3% of population with a mobile account. Being mostly domestic transfers and payments, rural Bangladeshi are not interested in saving money, they simply want to be able to send money via mobile services to their family so that they can avoid loans and thus, safeguard their families.

India is making large-scale efforts to provide IDs and bank the unbanked of India. On August 28, 2014, India launched the “Prime Minister’s People’s Wealth Scheme” (in Indian short — JDY) with a desire to provide every citizen with a bank account that has no minimum-balance nor frills. The scope of this project also included the 20% of India that is below the poverty line and the numerous rural population. The project proved quite successful with more than 300 million accounts opened so far.

India has shown that by lowering the bank transaction costs, hundreds of millions who were lacking financial services are getting aboard.

In 2011, 65% of India was unbanked. Nowadays, with the introduction of the JDY and some other programs like the Aadhaar ID, that percentage has fallen to 47%. Sixty percent of the opened accounts (See Figure below) were located in rural areas with a current deposit of around $10 billion.

Furthermore, two thirds of the JDY accounts has been linked to the corresponding Aadhaar ID. It is also noted that the JDY accounts are used more over time as people learn more about how to use them. It is evident that India is making progress but also that a long journey is ahead of them.

Another South Asia country is having a large issue with the unbanked, Pakistan. Pakistan has more than 85% unbanked which accounts for 5% of the world’s unbanked population, or 100 million is unbanked. In May 2015, Pakistan launched the National Financial Inclusion Strategy in order to help their unbanked.

Surprisingly — Pakistan is leading South Asia in digital finance and branchless banking with 6% of Pakistani having a mobile account corresponding to an average of 2.6% in South Asia.