Banking on Cell Phones May Fix Some Americans' Credit Woes

The answer to protecting your financial future might be in your pocket.

(Illustrated by Lauren Wade)

Apr 24, 2014· 2 MIN READ
Stephanie Mercado is a journalism student at Cal State-Fullerton and formerly worked at the UN High Commissioner for Refugees.

Banks try to make it easy to store your hard-earned money, with conveniences such as drive-up ATMs, paperless transactions, and check deposit by phone.

Yet about 8 percent of Americans—nearly 17 million adults—live in unbanked households, meaning they either opt out of using banks at all or don't have easy access to them. The Federal Deposit Insurance Corporation defines the unbanked as "those that lack any kind of deposit account at an insured depository institution." Another 51 million adults are what's called "underbanked"; they have a bank account but also rely on "alternative financial service providers," such as prepaid debit cards.

"There has been very aggressive marketing of prepaid debit cards over the past few years targeting young people and minorities," said John Ulzheimer, president of consumer education at "So it's not a surprise that more young people are using prepaid debit cards over credit cards."

However, hefty fines and hidden fees with some cards have proved problematic in the nonregulated banking world.

“Collectively, the underbanked paid some $78 billion in interest and financial service fees in 2011 alone, a practice that is unsustainable for this low-income demographic,” Banktech reported.

Beyond avoiding those fees, building credit is worthwhile for anyone who wants to buy a house or a car or chase the American dream.

Among the unbanked or underbanked, many lack a credit score or have an incomplete financial picture that makes lenders wary of working with them, even if they are financially responsible individuals who simply choose to do something different with their income.

Many Americans suffered through the 18-month-long Great Recession of 2007—the longest and deepest financial crisis since the Great Depression—leaving a large population with little to no trust in mainstream banking systems. Although people in underserved neighborhoods had previously lacked access to banks or avoided them altogether, growing unemployment created a lack of need for financial management, and the housing crisis exacerbated mistrust in big banks.

But where banks might find an area unsuitable for their services and consumers may be skeptical of the institution, personal cell phones may be the next-best banking platform. The FDIC projects wider use of alternative financial services over time, mainly in mobile banking.

About half of underbanked people are between the ages of 26 and 45. About 42 percent of young Americans have little or no credit history, and the number living without credit cards has doubled since the recession.

Many financial institutions had long assumed the underbanked consumer population to be unfavorable because of low income and poor credit. But building credit could already be in the pockets of many unbanked consumers.

Pew has found that 58 percent of Americans have smartphones with Internet capabilities, and more than half of them have used mobile banking in the past 12 months. Because a high percentage of unbanked and underbanked people have access to smartphones, 39 percent of the underbanked have used mobile banking in the last 12 months.

“The relatively high prevalence of mobile phone and smartphone use among younger generations, minorities, and those with low levels of income—groups that are prone to be unbanked or underbanked—makes mobile phones a potential platform for expanding financial access and inclusion,” the FDIC reports.