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What is Underbanked?
The term underbanked refers to individuals or businesses that have access to basic financial services but rely heavily on alternative financial providers due to limited access, high costs, or lack of trust in traditional banking institutions. The underbanked often use services like mobile money, cash loans, payday lenders, or informal savings groups.
Definition
The underbanked are people or organizations that maintain some relationship with formal financial institutions but continue to rely on alternative or informal financial services.
Key Takeaways
- Underbanked populations use banks but lack access to full financial services.
- They depend on alternative providers such as mobile money, microfinance, or payday lenders.
- Financial inclusion initiatives aim to reduce underbanking through accessibility, digital banking, and education.
Understanding Underbanked
The underbanked represent a significant portion of the global population, especially in emerging markets where physical bank branch access is limited. Even in developed economies, people may be underbanked due to low income, high banking fees, or lack of digital literacy.
Digital innovation has dramatically improved financial access. Mobile money platforms such as M-Pesa in Kenya and fintech apps like Chime or Revolut offer low-cost financial services that compete directly with traditional banks. These platforms cater to the underbanked by providing affordable transfers, savings tools, and microcredit.
Governments and global financial institutions consider underbanking a barrier to economic growth because it limits wealth creation, business expansion, and financial resilience.
Formula (If Applicable)
Not a formula-driven concept, but often measured by:
- Financial Inclusion Index: Percentage of population with access to formal finance.
- Banking Penetration Rate: Number of bank accounts per 1,000 adults.
- Mobile Money Penetration: % of adults using digital wallets.
Real-World Example
The World Bank reported that mobile money platforms significantly reduced underbanking in Sub-Saharan Africa. In Kenya, M-Pesa helped bring millions of underbanked individuals into the formal financial ecosystem by offering low-cost transfers and savings features.
Importance in Business or Economics
Reducing underbanking is crucial for:
- Economic development and poverty reduction.
- Increasing tax revenue through formal transactions.
- Encouraging entrepreneurship and SME growth.
- Enhancing financial stability and reducing reliance on high-cost informal lenders.
For businesses, serving underbanked markets presents massive opportunities, particularly through fintech solutions.
Types or Variations
- Digitally Underbanked: Have accounts but lack digital banking access.
- Geographically Underbanked: Live far from banking infrastructure.
- Economically Underbanked: Avoid full banking services due to cost.
- Informally Underbanked: Prefer informal or community-based financial tools.
Related Terms
- Unbanked
- Financial Inclusion
- Mobile Money
Sources and Further Reading
- World Bank Global Findex — https://globalfindex.worldbank.org
- IMF Financial Access Survey — https://www.imf.org
- CGAP (Consultative Group to Assist the Poor) — https://www.cgap.org
- OECD Financial Inclusion Reports — https://www.oecd.org
Quick Reference
- Underbanked individuals have partial access to banking.
- Often rely on alternative or digital financial services.
- Reducing underbanking boosts economic participation.
Frequently Asked Questions (FAQs)
What is the difference between unbanked and underbanked?
Unbanked individuals have no access to formal banking, while underbanked individuals have limited or incomplete access.
Why are people underbanked?
Common reasons include high banking fees, lack of trust, limited branch access, and low financial literacy.
How can technology reduce underbanking?
Mobile banking, digital wallets, and fintech credit systems offer low-cost alternatives to traditional banks.
