Unsure about unbanked vs. underbanked in Canada? Our guide clearly defines each term, explains why people use alternative financial services, and answers key questions about financial access.
Unbanked vs. Underbanked: What’s the Difference?
Unbanked vs. Underbanked: What’s the Difference?
What Does It Mean to Be Unbanked?
To be unbanked means that an individual or household does not have a transactional account, like a chequing or savings account, at an insured financial institution such as a bank or credit union. The unbanked definition points to a complete separation from the formal banking system. In economic terms, the unbanked definition in economics describes people who operate entirely on a cash basis or use non-traditional services for all their financial activities, from receiving wages to paying bills. This means they cannot write a cheque, use a debit card, or build a credit history through a traditional banking relationship.
- They operate entirely outside the conventional financial system.
- All transactions are conducted using physical cash or alternative financial methods.
- They lack access to basic financial tools like debit cards, direct deposit, and credit-building opportunities.
Summary
In this guide, you’ll learn the essential differences between being “unbanked” and “underbanked.” We’ll explore the clear definitions of each term, why individuals might find themselves in these situations, and the alternative financial services they often use. You will also find answers to frequently asked questions about related terms like “debanked” and the demographics of these populations, helping you understand the nuances of financial access in Canada and beyond.
TLDR
- Unbanked: You have no bank account at all and use only cash or alternative services.
- Underbanked: You have a bank account but still need to use services like payday lenders or cheque cashing because your bank doesn’t meet all your needs.
- Key Difference: The main difference is account ownership. Unbanked individuals have zero accounts, while underbanked individuals have at least one.
- Why it Happens: People become unbanked or underbanked due to high fees, lack of trust in banks, inconvenient locations, or not meeting minimum balance requirements.
📑 Table of Contents
What Does It Mean to Be Underbanked?
To be underbanked means an individual has a chequing or savings account but still regularly depends on alternative financial services to manage their money. A simple definition for underbanked is having one foot in the traditional banking world and one foot out. According to the underbanked definition in banking, these individuals find that their basic bank account is insufficient for their needs. This could be due to high fees for certain transactions, slow processing times for transfers, or a lack of accessible features. This hybrid status signifies that while they have access to the formal financial system, it fails to serve them completely, pushing them toward other options for specific financial tasks like cashing a cheque or getting a short-term loan.
Unbanked vs. Underbanked: The Main Differences
Understanding the distinction between the unbanked vs underbanked populations is crucial for grasping the landscape of financial inclusion. While both groups face barriers within the traditional financial system, their relationship with it is fundamentally different. The core of the unbanked underbanked definition lies in whether an individual has a basic bank account. Here’s a clear breakdown of the key differences.
| Feature | Unbanked | Underbanked |
|---|---|---|
| Account Ownership | Has no chequing or savings accounts. | Has at least one chequing or savings account. |
| Service Usage | Relies exclusively on cash and alternative financial services (e.g., cheque cashing, money orders). | Uses a mix of traditional banking services and alternative financial services. |
| Financial Health Implications | Faces significant challenges in building credit, saving securely, and accessing loans. Transactions are often costly and less secure. | May have some access to credit and savings tools but often incurs high fees from third-party services, which drains wealth over time. |
Why People Turn to Alternative Financial Services
The underbanked definition in finance is closely tied to the reasons why a traditional bank account isn’t enough. The underbanked meaning becomes clearer when we examine the specific barriers that push people toward other options. These are not just matters of preference but often of necessity and practicality. Individuals turn to alternative financial services for several key reasons:
🚫 High Costs & Fees
Many traditional bank accounts come with monthly maintenance fees, minimum balance requirements, and high overdraft penalties. For those with fluctuating incomes, avoiding these banking fees is a primary concern.
distrust & Past Experiences
A lack of trust in financial institutions, often stemming from past negative experiences or the 2008 financial crisis, can make people hesitant to deposit their money in a bank.
📍 Inconvenient Locations & Hours
In many rural or low-income urban areas, physical bank branches are scarce (“banking deserts”). For individuals working non-traditional hours, accessing a bank during its operating window is a major challenge.
Consequently, these populations often rely on more accessible, albeit more expensive, services. Common services used in Canada and globally include:
- Payday Lenders
- Provide short-term, high-interest loans intended to be paid back on the borrower’s next payday.
- Cheque Cashing Services
- Offer immediate cash for a payroll or government cheque for a percentage-based fee, bypassing bank hold times.
- Money Orders and Remittances
- Used for paying bills or sending money, especially internationally, without needing a bank account.
- Pawn Shop Loans
- Provide collateralized loans where personal items are held as security. If the loan isn’t repaid, the item is sold.
Frequently Asked Questions (FAQ)
What is the definition of debanked?
The debanked definition refers to a person or entity that previously held a bank account, but the financial institution involuntarily closed it. This is different from being unbanked, which implies never having an account or choosing not to have one. Debanking often occurs due to a bank’s internal risk management policies, concerns about a customer’s source of funds, or for compliance reasons related to anti-money laundering (AML) regulations.
Who is most likely to be unbanked or underbanked?
Statistically, the people who are unbanked are most likely to belong to certain demographic groups. The underbanked population often shares similar characteristics. These groups typically include lower-income households, younger adults who are new to the financial system, individuals with less formal education, and certain minority or immigrant populations who may face language or documentation barriers. These individuals are more likely to find the costs and requirements of traditional banking prohibitive.
Is it possible to be both banked and underbanked?
Yes, and this is the core of the underbanked definition. The term “underbanked” is actually a subset of the “banked” population. When comparing banked vs underbanked, a banked person has an account that meets their needs, while an underbanked person has an account that does not. Therefore, you can be banked and underbanked simultaneously. However, you cannot be unbanked and underbanked at the same time, as being unbanked means you have no bank account to begin with.
Written by
Conor Byrne
