The Many Costs of Being Unbanked or Underbanked

Think about the last time you paid for a utility bill and the last time you received your paycheck. If you’re like me, I bet all you had to do was log-in into your bank and check your account to ensure your paycheck was deposited, and then pay your utility bill at the same time. Plus, doing so was most likely free.

The entire matter probably took a couple of minutes, at most. For the unbanked and underbanked, doing the above is impossible.

Did you know that about 1 million Canadians are completely unbanked? A further 4 millions are underbanked. What does it means? And what are the consequences of being unbanked or underbanked?

Definition of Unbanked and Underbanked

Being unbanked means not having a bank account, whether checking, saving or investing. It also means not having access to traditional credit.

Being underbanked means having a basic checking account but lacking access to other financial services and products.

There are several reasons as to why one may be unbanked or underbanked:

  • Not meeting banks’ requirements: each financial institution has its own checklist for opening bank accounts. That being said, in Canada a bank needs to have a valid motive to deny you services. The federal government considers a checking account to be a right, not a privilege.
  • Lack of access: although neo banks are making banking easier, some remote communities don’t have any bank nearby
  • Lack of financial literacy
  • Lack of trust in the banking system
  • Lack of proper identification
  • Language barrier
  • New to Canada
  • Homelessness

Let’s take a look at what it means on a-day-to-day basis.

High Financial Costs

Being unbanked or underbanked is expansive. When you’re unbanked, you have no choice but to rely on check-cashing and payday loans services to pay your bills, access your money and borrow.

These services charge high fees and equally high interest rates. It’s very common for the unbanked or underbanked to spend hundreds if not thousands of dollars per year on fees and interests.

This money isn’t available for savings or for something else.

High Time Costs

Alternate financial services don’t operate online. You have to go and request services in-person.

Impossibility to Build Credit History

In North America, having a credit score and history is very important. It goes beyond being able to borrow money.

It’s very common for landlords and insurance companies to do credit checks. Some employers may also require one. One way to build said credit history and score is to have credit products, such as a credit card or a personal loan.

This option isn’t available to the unbanked and underbanked. The best they can do is a prepaid credit card. Unfortunately, a prepaid credit card doesn’t build credit history.

Impossibility to Build Wealth

The options for saving and investing money as an unbanked or underbanked household are very few.

Keeping money in cash at home leaves you vulnerable to theft—and the money will lose value over time due to inflation. Loading up a prepaid card with extra cash can protect you from theft, but you will have to pay the card’s fees.

In addition, both of these options for savings leave you open to temptation, since the money is already in conveniently spendable form.

Buying a home is also impossible. The origin of the down payment needs to be documented. Lenders ask for bank statements, on top of doing a credit check.

Being unbanked or underbanked keeps people in poverty and on the fringe of society.

Going from Unbanked to Banked

If you’re unbanked, there are a few things you can do to turn banked. Some may be time consuming and cost some money, but it’s worth it. As indicated above, when unbanked or underbanked, you’re already spending more money on fees than you should.

Depending on your circumstances, you may try the following:

  • Address your biases, if you don’t trust the banks: the banking system in Canada is solid, and banks aren’t out to get you.
  • Educate yourself to become more financially literate: you’ll understand the jargon better and will be able to decline products/services you don’t need and obtain the ones you need.
  • If language is a problem, use Google translation or ask someone to translate for you.
  • Obtain the proper identification, if you don’t have it: As long as a bank can verify your ID, a Canadian bank can’t deny you a checking account, unless they believe you gave them false/misleading information. A low credit score or lack of money aren’t valid motives to turn you down, particularly with a chartered bank. Credit unions are a slightly different matter, as they have a minimum credit score requirement. Also note you don’t need a Social Insurance Number -SIN- to open a checking account. This is only required for savings and investments accounts.
  • If there are no brick-and-mortar banks in your community, use a virtual bank, like Tangerine, EQ or PC Financial. These don’t charge any monthly fees.
  • Use a secured credit card to build your credit history/score: a secured credit card is a credit card backed-up by a deposit from the cardholder -you!-. The deposit serves as a collateral in case of non-payment. Each credit card companies has different requirements. Some ask for a minimum amount of $ 500, that becomes the credit limit, whereas others, like Capital One has a minimum of $75 that represents 10% of the credit limit. I used Capital One when I first came to Canada and it definitely helped me build my credit profile, as this company reports to both Equifax and Transunion.

Final Word

As we can see, there are no advantages to being unbanked or underbanked. In Canada, recognition of the importance of financial inclusion has grown, thanks in part to the emergence of neo banks, as well as financial literacy programs.

That being said, it still is insufficient. Our federal government should expand the scope of essential banking services to include savings, investing and credit accounts, as well as mandate fair banking practices and crack down on the financial abuse from pay-day loan services once and for all.

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