We need to redefine what it means to be 'unbanked' or 'underbanked'

• Key insight: Our understanding of what it means to be unbanked and underbanked simply does not reflect the complexity of today's financial services industry.
• Supporting data: New research from the Financial Health Network finds that 76% of U.S. households used at least one nonbank financial service in the past year, and 72% used a peer-to-peer payment app.
• Forward look: We need to know how households navigate financial services in this changing environment, which combinations of products they rely on, which combinations meet real needs and which introduce cost or risk.
  

The unbanked rate in the United States sits at a record low of 4.2%. Estimates of the number of underbanked consumers have dropped over the past 15 years. Based on the financial inclusion metrics the industry has used for a generation, this represents steady progress. Low-cost Bank On accounts, the spread of mobile banking, and sustained attention from providers, regulators, and community organizations have made meaningful inroads.

But these headline numbers no longer mean what they once did. The definitions of "unbanked" and "underbanked" were created to describe a financial services landscape that no longer exists. As a result, both of these metrics — which still anchor industry strategy, regulator measurement and philanthropic investment — obscure as much as they reveal.

The problem is not that fewer people use nonbank financial services. In fact, more people do today, and for reasons that often have little to do with exclusion. New research from the Financial Health Network, or FHN, finds that 76% of U.S. households used at least one nonbank financial service in the past year, and 72% used a peer-to-peer payment app.

This is just the tip of the iceberg. Buy now/pay later, earned wage access, direct-to-consumer cash advances, prepaid cards, retail investing platforms and crypto wallets were once-niche products built for people locked out of traditional banking. Now they are mainstream and widely used by people who also have a checking account, with new research revealing that 22% of consumers who said they don't have or don't know if they have a checking account also reported using a fully digital bank.

When the majority of households go outside a "primary financial institution" for at least part of their financial lives, defining who counts as underbanked becomes more complex. Are people underbanked if they store balances in P2P wallets without FDIC insurance? Or if they use EWA heavily? Or if they stack BNPL products across providers? What about retail investors who move from index funds to leveraged single-stock ETFs to sports betting apps?

Our understanding of what it means to be unbanked and underbanked simply does not reflect the complexity of today's financial services industry. We treat the use of nonbank financial products as a proxy for unmet needs, when in fact it is often a choice based on convenience, cost or simply the way people bank today. Treating these products as an unambiguous sign of lacking access is the wrong interpretation. It makes invisible exactly what financial services providers most need to see: the wide range of consumer financial decision-making and behavior as people combine products across platforms and providers to meet their needs. It also critically obscures where those combinations introduce cost, risk or harm.

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A more useful framework centers around consumer needs and financial health outcomes. Consider two consumers who may both "count" as underbanked: The first consumer holds a checking account but pays for check cashing because they feel their bank's basic services are inconvenient; the second turns to BNPL and EWA for short-term liquidity their bank doesn't offer. These are two different problems that require two different responses.
Even that distinction understates the complexity. An occasional BNPL user paying on time is not the same as a multi-loan stacker who juggles repayment cycles. Motivations matter as much as behaviors. The consumer using a fintech app for convenience, the consumer using a product not offered by their bank, and the consumer who lost trust in mainstream banking are signaling three different messages, yet standard categories are collapsing them into one.

Outcomes-based measurement, built around what customers say they need rather than around existing account categories, tends to reveal demand and risk that standard metrics don't capture. What financial services providers of all stripes need now are definitions and metrics that capture complexity and help identify where people have real unmet needs, face real risk, or truly lack access to affordable options. That's the only way the labels "banked" and "underbanked" remain useful in a world where people mix and match financial services across dozens of providers.

One idea is to distinguish between the "transactional underbanked" and the "credit underbanked." The transactional underbanked hold a checking account but rely on other products, like prepaid cards, check cashing and P2P wallets to store and move money. The credit underbanked use a bank or credit union for everyday transactions but turn to nonbank products and provider apps for short-term credit.

The financial services system has changed, and with the advent of new technologies, it will continue to rapidly evolve. We need to know how households navigate financial services in this changing environment, which combinations of products they rely on, which combinations meet real needs and which introduce cost or risk. An industry that can ask and answer these questions will design better products and connect with more consumers, which is how we will find more success in driving financial health for all.