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What is Underbanked?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 07 November 2019
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    Conjecture Corporation
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The term "underbanked" is used in two very different ways in the financial world. In the first sense, it refers to a situation in which an underwriter preparing for a new security issue has trouble finding other underwriters to commit. In the second sense, the term is used to describe people who utilize banking services in a limited way. Underbanked people are often at risk for exploitative financial practices because they may be unfamiliar with the financial system or they may lack influence.

When a company prepares to issue new securities such as stocks and bonds, it seeks out brokers who will act as intermediaries between the company and the public. These brokers, also sometimes known as underwriters, prepare the offering and provide it for sale to the public. Sometimes, a situation in which the primary broker is underbanked arises; in this situation, the broker has trouble issuing the securities because it cannot form a large enough syndicate of underwriters.

When a new issue is underbanked, it can be difficult to provide the security to members of the public. The broker may have other underwriters who are unwilling to commit, making the issue risky, or it may simply be unable to find underwriters. Reluctance on the part of potential underwriters can be a sign that there are concerns about the strength of the securities being offered.

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Underbanked individuals are people who do not rely very heavily on financial services. They may not have a bank account at all, or they may have limited accounts, such as a single checking account with no access to savings or investment accounts. Likewise, underbanked people may not have credit cards or access to lines of credit.

There are a number of reasons why people may be underbanked. Undocumented immigrants often lack access to banking services; other people may not use financial services because they have low credit scores and cannot do things like take out loans or open credit cards. As a result of their lack of access, these individuals must rely on instruments like money orders to move money around, and they may also be preyed upon by purveyors of high risk credit such as check cashing businesses. This can create a snowball effect in which someone at first cannot access credit due to limited credit history and then cannot get credit because his or her credit score has been lowered as a result of defaulting on bad debt.

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pleonasm
Post 3
@Mor - In my opinion, this kind of person has just as much to fear from being exploited by the banks as by other kinds of unscrupulous people. Just because someone is underbanked doesn't meant they don't understand how banking works.

Many forms of banking lead people into terrible financial situations. Overdrafts, credit cards and loans are just a few examples. I know that you have to do these things to get credit, but some people just don't need it and I wish that I was one of them.

I think that any time anyone manages to escape the corporate run around we try to use scare tactics to bring them back on board. Yes, there are people who don't use these banking options because they don't understand them, but I think mostly they don't use them because they don't need them.

Trying to force the options on them is wasting their time.

Mor
Post 2
I can definitely see how people who are underbanked might be exploited, as banking seems to become more and more complicated for someone who isn't paying attention to all the changes.

For example, there are plenty of people who have probably never even imagined using the internet to do their banking and don't know how that would work.

But they will spend money on getting someone else to do it for them, because they think it must be complicated. In fact, once you know how, it's very easy and safe (at least as safe as any other means of keeping your money) but I can imagine from the outside it looks scary and uncertain.

lluviaporos
Post 1

I imagine during a recession it can be easy for brokers to be underbanked. I know that there is still quite a lot of call for the deregulation of banks with the idea that it'll mean less of this kind of situation, since unsafe business practices will naturally fail to thrive.

But personally, I think that it will only lead to more of this, since without regulation fewer brokers will want to commit when a security may not live up to its name. I don't know much about it, but I think that deregulation will lead to more underbanking, rather than less.

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