Financial inclusion matters for both individuals and the economy. Having safe and sustainable access to financial services and products can increase households’ financial stability and wealth. This leads to more transactions across the economy, enhancing real (i.e., inflation-adjusted) growth.

One key measure of financial inclusion is the unbanked rate, or the share of households without a checking or savings account. Though the unbanked rate has declined in recent years, the unbanked rate among households with low incomes has remained persistently higher than the national average.

According to a biennial survey conducted by the Federal Deposit Insurance Corporation (FDIC), the overall unbanked rate fell from 7.6 percent in 2009 to 4.2 percent in 2023. But among households with annual incomes below $75,000, the unbanked rate fell from 10.4 percent to 5.4 percent (higher than the national average).

Previous studies and reporting have shown that a lack of trust in banks leads some households to avoid mainstream financial services, but the studies and reporting provide little insight into what underlies that lack of trust.

Results from a new survey commissioned by the Partnership for Financial Equityshed light on the challenges unbanked people with low incomes face. Conducted by the MassINC Polling Group, the survey captured trust in banking among 642 Massachusetts residents with incomes below $80,000, about 80 percent of the state median income.

Though the survey’s sample size is small, the results offer insights into how financial institutions and regulators can build trust with unbanked households and promote greater financial inclusion.

Consumers who lack trust in banks were more likely to report that banks don’t provide clear and honest information

Among the consumers with low incomes surveyed, the most common reason respondents said they were unbanked was that account fees were too high. This was especially common for Latine households. And among unbanked households, 40 percent said that they would be convinced to open a bank account if it didn’t have fees or penalties.

Survey respondents without bank accounts were far less likely than their banked counterparts to say they trusted banks. Specifically, 88 percent of respondents with bank accounts agreed with the statement “I trust banks in general,” compared with 55 percent of unbanked respondents.

Among all respondents, trust in banks was highly correlated with a respondent’s belief that banks give clear and honest information. About 46 percent of unbanked respondents disagreed with the statement “Banks give clear and honest information,” compared with 11 percent of banked respondents. This suggests that even when unbanked consumers are aware of low-cost accounts, they may still lack confidence that the information is trustworthy.

When asked an open-ended question about the main reason they didn’t trust banks, more than 15 percent of respondents who didn’t trust banks expressed concerns about “hidden fees,” “extra fees,” and banks “sneaking in fees” on accounts that were advertised as fee-free.

This suggests that to decrease the unbanked population, financial institutions would not only need to improve and advertise product offerings that meet consumers’ needs but work with consumers to build trust in their product offerings.

Regulatory institutions, such as the Consumer Financial Protection Bureau (CFPB) and the FDIC, can also play a role in fostering trust. In the survey, 9 percent of respondents who generally trusted banks mentioned government regulation in an open-ended question about why they trusted banks. At a time when the CFPB and FDIC have faced staffing reductions and changed oversight processes, the survey highlights how these efforts could affect consumers’ trust in banks.

Many households with low incomes move between banked and unbanked status

Research from the FDIC has shown that about half of unbanked households previously held accounts. The Partnership for Financial Equity survey found a similar trend, with nearly 70 percent of currently unbanked survey respondents reporting that they previously had a bank account.

In addition, the survey results highlight how experiencing a financial hardship can contribute to households moving from being banked to being unbanked. More than half of previously banked consumers reported previously overdrafting on a checking account . About a quarter said they had been defrauded or scammed in the past. (The question didn’t specify whether it was a financial institution or other entity that perpetrated the scam.)  

To expand financial inclusion, sustainability is key. Fees and penalties can force people with low incomes and people of color out of the financial mainstream because they tend to face more volatility in the job market and have limited emergency savings.

To help more households maintain bank accounts—even during periods of hardship—financial institutions could eliminate or reduce overdraft fees. Limiting fraud and scams and promptly resolving customer issues when they do occur could also help more households remain banked.

Banks could engage in relationship banking practices—in which banks focus on helping people meet their individual financial goals—to meet the needs of customers from traditionally underserved communities. Though banks typically focus on building relationships with wealthy consumers, this practice could also help promote financial inclusion among households with low incomes and help financial institutions gain long-term consumer loyalty in an increasingly competitive financial marketplace.

Many people with low incomes use alternative financial services, even when they have bank accounts

More than half of banked respondents reported using one or more alternative financial services, like prepaid cards, check-cashing services, money orders, short-term personal loans, cryptocurrency, or buy now, pay later.

These alternative services are often costly. Buy now, pay later loans carry high interest rates, and the fees on check cashing and money orders can cost up to hundreds of dollars annually. Research shows that using alternative financial services can reduce financial stability and wealth (PDF), especially among consumers with low incomes.

Still, there are several reasons low-income consumers may prefer alternative financial services to bank accounts. Though fees on check cashing and money orders can be high, they are stated up front so consumers don’t have to worry about hidden or unexpected fees, like overdraft fees. Unbanked consumers, especially those with low or no credit scores, may turn to payday lending to help cover basic expenses or smooth their cash flows. Alternative providers are often located in communities with low incomes and have longer hours, making them more convenient than traditional banks for many.

Like previous research, these survey results suggest that even banked consumers with low incomes may find that alternative providers offer better customer service and more convenient and accessible products.

Though the unbanked rate continues to fall, financial institutions can foster more financial inclusion by offering transparent products and creating strong relationships with people and communities. Federal regulators can support these efforts by regularly supervising bank practices, publishing their findings, and answering consumer complaints quickly.
 

Amalie Zinn is a former employee of the Urban Institute. She is currently a doctoral student at the University of Southern California’s Sol Price School of Public Policy. She served as a subject-matter expert for the Partnership for Financial Equity’s survey, contributing to the survey’s design and analysis of its results.