Ditch the Word 'Underbanked,' It's Confusing and Misleading

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When I tell a waiter my pork chop is "undercooked," I mean my entree hasn't been cooked long enough.

When prospective employers inform me I'm "underqualified," they're saying I don't have enough qualifications to do the job.

So when the U.S. government classifies me as "underbanked," it must be saying that banks play an insufficient role in my financial life, right? But how much is enough?

The first test for being counted as underbanked, according to the Federal Deposit Insurance Corp., is having a bank account. (Those without a bank account are, of course, "unbanked.") In addition, the individual must have gone somewhere other than a bank for a specified financial service at least once in the past 12 months.

That could mean buying as few as one money order, or sending a single remittance from Western Union (WU). Or it could mean taking out one payday loan. But meeting the government's criteria does not necessarily mean a person's access to the banking system is impaired in any way, as one might assume.

The FDIC's broad definition helps explain its conclusion last September that a whopping 51 million U.S. adults, or one out of every five households nationwide, were underbanked. And it suggests that the word – which has become embedded in our financial lexicon over the last few years – is not a terribly useful descriptor.

The word "underbanked" seems more popular than ever. FactorTrust, a Georgia-based company, recently began publishing a quarterly Underbanked Index to highlight trends in consumer data.

But "the underbanked," as the term is currently used in the consumer finance industry, is also fuzzier and more misleading than it's ever been. Increasingly it's a euphemism to describe people who can't get a loan at an affordable interest rate, often because they have a poor credit history. After all, "serving the underbanked" sounds a lot better than "making subprime loans."

The much-maligned payday lending industry has even begun to use the word "underbanked" as a public-relations tactic. The website of the payday lender Cash America reads: "In 1983, Cash America founder Jack Daugherty opened the first Cash America Pawn in Irving, Texas, with hopes to build a company that would service the under-banked population – those who could not get financial help from traditional financial lenders."

(There's also an annual conference, cosponsored by American Banker, formerly known as the Underbanked Financial Services Forum. Starting next year it will be called Emerge: The Forum on Consumer Financial Services Innovation.)

The meaning of the word "underbanked" has evolved considerably over the decades. Back in the 1980s, specific geographic areas were frequently described as "underbanked," but individuals were not, according to a LexisNexis search of news articles.

"Nigeria, with about one bank branch for every 100,000 people, is still chronically underbanked," read a London Guardian story from 1985 that exemplifies how the word was used at that time.

It was not until the mid-1990s that the term "the underbanked" – a reference to people rather than places – appeared. At first this new term served as an extension of the word it evolved from; it referred to people who lived in places with few bank branches.

"And the 'underbanked' do not live only in rural areas," read a Toronto Financial Post story in 1995. "In central Toronto, a large neighborhood is virtually branchless."

Soon "the underbanked" was being used to describe people who had a tenuous relationship with the banking system, not individuals who lived in neighborhoods with a dearth of bank locations.

"A significant percentage of all households are unbanked or underbanked," Stephen Brobeck, executive director of the Consumer Federation of America, said at a 1997 news conference. "The Treasury Department estimates that 23% have no accounts or accounts with under $200 with traditional banking institutions. These unbanked and underbanked households are disproportionately low-income and minority."

By the late 2000s, the question of whether people were underbanked no longer had anything to do with how much money they had on deposit at a bank. Instead, it hinged on the extent of their relationships with nonbank financial institutions.

In 2008, the Center for Financial Services Innovation defined underbanked adults as people who "may have [a] current checking account and/or current savings account if [the] individual made one or more non-bank financial transactions in the past 30 days."

Also about five years ago, the FDIC adopted its own, more inclusive definition of the underbanked. Rather than requiring a person to have used a nonbank financial provider in the last 30 days, the FDIC settled on a definition that required just one such transaction over the previous 12 months.

Part of the FDIC's reasoning for adopting this definition, according to an official at the agency who did not want to be identified, was to highlight the opportunities for banks to keep consumers inside the banking system.

If the FDIC were to tighten its definition, the number of underbanked households in the United States would drop sharply.

Consider the impact of including people who at least occasionally use nonbank money orders but don't otherwise fit the FDIC's definition. If those people were excluded, the percentage of U.S. households that are counted as underbanked would fall from 20.1% to 10.4%, according to the FDIC's 2012 report.

In the three decades since Jack Daugherty opened that pawnshop in Texas, the word "underbanked" has morphed beyond recognition. Can we please stop using it?

Kevin Wack is a consumer finance reporter at American Banker. The views expressed are his own.

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