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.
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.