Being Unbanked in Canada: The Social Impacts

The World Bank estimates that in 2022, 1.4 billion people worldwide remained unbanked –  an overwhelming number of which are women, poor and living in rural areas. This problem is not exclusive to those living in developing countries. 

Up to 21% of North Americans experience financial exclusion, with 15% of Canadians being underbanked, representing 6 million people, while 3% of Canadians are completely unbanked.

Living with little to no access to banking and other financial services, whether it be by choice or by circumstances, is living precariously. Financial exclusion has significant impacts on one’s quality of life.

What Does It Mean to Be Unbanked?

To be unbanked means not using any traditional financial services, for example, having neither a checking account nor a savings account. The unbanked will instead rely on cash transactions or alternative financial services including payday loans or money orders with often predatory interest rates.

The term “underbanked”, on the other hand, refers to traditional banking account owners who rely primarily on cash transactions and alternative financial services instead of their bank accounts or credit cards.

Who Are the Unbanked?

While in developing countries, most of the unbanked population were never financially included in their lifetimes, the situation in Canada is quite different. Some Canadians are being left behind by financial institutions they were previously relying on.

If in 2016, 65% of unbanked Canadians were between the age of 18 and 34, today, senior citizens are more at risk of being financially excluded. Indeed, as digital financial services grow, especially since the 2020 pandemic, many physical bank branches are closing. These closures affect the older generation who are less familiar with digital transactions, making them a notably underbanked population worldwide and in Canada.

Bank closures have also disproportionately affected low-income communities in neighborhoods with greater concentration of ethnic and racial minorities and those who live in rural communities. Low-income earners and rural populations are themselves at greater risk of being unbanked, which plays a part in their branches closing as banks perceive a lack of profitability in these areas. This hurts the communities they are leaving behind.

Although the significance of immigrants in the Canadian economy is undeniable, accounting for 90% of the labour force growth, they tend to struggle more with financial concepts for various reasons, including possible language barriers or unfamiliarity with certain products and services, which translates into lower financial literacy.

Additionally, it was found 90% of migrants had sent money to their family abroad in 2023. Bank services such as international wires are often too expensive for their remittance needs. As a result, they turn to alternative financial services like Western Union and fintechs.

Another population which faces financial exclusion are those with no formal addresses, including the unhoused population. Similarly, those who lack identification papers are unable to open bank accounts.

Why Are People Unbanked?

There are many reasons why one may remain unbanked. Some are left with no other option whereas others make a conscious choice not to engage with formal financial institutions.

On one hand, those who do not possess an address may struggle to find a bank which will accommodate their circumstances, as most traditional banking institutions require proof of residency. 27% of unbanked adults worldwide cite a lack of necessary documentation as a barrier to account ownership.

High fees and minimum balance requirements also prevent the financial inclusion of many around the world. In the United States, 21.7% of unbanked households are unbanked because they do not have the funds necessary to maintain a bank account.

ACORN identifies, in Canada, similar barriers preventing low-income earners from accessing and maintaining a bank account like overdraft or non-sufficient funds (NFS) fees.

Another leading reason why people do not own financial accounts worldwide according to the Global Findex Database is distance from financial services. Although Canada has 20.7 commercial bank branches per 100,000 adults, significantly more than the global average of 11.18, accessibility is not necessarily at its best for everyone.

According to a report by the Bank of Canada, the average Canadian has to travel 4.5 km to their nearest bank branch whereas rural Canadians have to travel on average more than double this distance, without accounting for recent commercial branch closures. Rural branches have declined by 7.2%. Some have to drive an hour to their nearest bank branch. Geographical exclusion is likely to worsen if this trend continues.

Even if people living in areas underserved by banks make the effort to travel to create a bank account, they are likely to remain underbanked as it would be too inconvenient to travel that distance regularly. As such, they are unable to benefit at the fullest from their banking accounts.

Another reason why people remain unbanked is a question of language. Immigrants whose skills in the language in use are not sufficient to understand the different financial products local banks offer may have to be forced to be unbanked. Among the 15% of Hispanic households who are unbanked in the United States, 49% of them cite language as the main barrier to account ownership.

On the other hand, some may choose not to create a banking account and use traditional financial services, relying instead either on cash or alternative financial services. More than 20% of the unbanked worldwide do not trust existing institutions.

Some may find check cashing services more transparent than a bank checking account. Whereas fees are visibly displayed in check cashers, they are hidden in disclosure documents of a median of 111 pages when signing up for a checking account at a financial institution according to a Pew Health Group study.

Regardless of why people are unbanked, to be financially excluded in this way has significant impacts on their lives.

How Does Being Unbanked Affect One’s Life?

The unbanked population around the world overlaps with populations that are already vulnerable to less than ideal circumstances and limitations. Being unbanked, although often a symptom of larger societal issues, such as poverty, gender and racial discrimination and precarious living arrangements, also exacerbates the impacts these may have on their lives.

Being stuck in this cycle and feeling trapped by one’s financial situation leads to psychological distress, which also impacts the family and in the long term shapes the community they live in, especially if one lacks the means to access mental health resources. Living in a mostly banked country can additionally feel isolating, especially during the COVID-19 pandemic which caused many stores to go cashless.

Aside from the psychological toll of poverty reflecting on society, those who live in precarious conditions also face a poverty premium, which refers to the extra costs low-income earners garner in paying for essential goods and services compared to those who have higher income.

Terry Pratchett’s boots theory illustrates this well. A poor person who can only afford to buy poor quality boots will ultimately pay more in boots bought over a lifetime than the rich man who had enough money to buy high quality boots initially.

Being financially excluded or not utilizing one’s banking account to its full advantage ends up being costly over several years because of accumulated missed opportunities, including investments, savings accounts with interest rates which cushions against inflation or building credit.

This makes it difficult for already vulnerable populations to gain upward mobility, in effect, keeping them in a cycle of poverty. Financial exclusion entrenches social stratification and exacerbates existing inequalities in Canada.

Without a bank account or without consistent access to one, people have to resort to alternatives, including saving their money at home. This is risky practice as cash is susceptible to theft. Furthermore, cash savers also lose to inflation, which takes a significant hit on low-income households through rising food and transportation prices. Financial exclusion stunts a person and their family’s overall quality of life.

Other alternatives like microloans and payday loans, which operate primarily in highly developed countries, advertise themselves to its marginalized communities as easy tools for empowerment. They take high interest rates that can reach 600% on small loans of up to 1500$, taking advantage of the vulnerable and keeping them both indebted and in need of their services.

Furthermore, children learn from their parents’ financial behaviours. They are likely to share similar attitudes towards money once they reach adulthood. Even if they open a bank account, they may be behind in terms of financial literacy compared to their peers, which also impacts someone’s ability to surpass their circumstances and improve their living conditions.

Towards True Financial Inclusion

In Canada, 86% of households own at least one mobile phone and 95% of adults have reported using the internet. Millions of Canadians have even turned to digital-only banks like Tangerine, EQ Bank, Neo Financial, Koho and soon EZO.

If financial banking seems like the way to go for financial inclusion because of its reach and low costs, it is important to remember those who may be left behind in an effort to digitize all operations.

EZO

At EZO, we value financial inclusion for all. Our mission is to bridge the gap between people and financial institutions by making financial services more accessible and convenient. We believe financial products like investments and savings accounts are key to unlocking opportunities and stability in every other aspect of our life.

Our all-in-one EZO SuperWallet is designed to fit our users’ needs – whoever and wherever they may be. We aim to overcome geographical and digital literacy exclusion through our practical and simple financial ecosystem.

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