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Most people have bank accounts, but 10.5% of the U.S. adult population is considered unbanked, meaning neither they nor their spouse or partner has a checking, savings or money market account. These people may find it difficult or expensive to deposit paychecks, use online payments or get loans.

In a new report, the Federal Reserve identifies mobile banking as a way to potentially increase the unbanked’s access to financial services. That way, they may not have to rely on prepaid cards, which can carry hefty fees, or payday loans, which often carry triple-digit interest rates and frequently lead to cycles of costly debt. Even people with bank accounts often use alternative financial services, including check cashers, pawn shops, auto title loans, prepaid cards and payday lenders. In the Fed report, these consumers are referred to as the underbanked, and they make up 16.9% of the U.S. adult population.

Taking Advantage of Mobile Phones

If the unbanked and underbanked are looking for convenience, mobile financial services could be a helpful option. Of the unbanked, 69% have access to a mobile phone (49% of which are smartphones), and 88% of the underbanked have cellphones (64% are smartphones).

“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 report says.

Overall, 87% of U.S. adults have regular access to a cellphone, 61% of which are smartphones.

About a third of underbanked consumers say they have used mobile banking in the last 12 months, meaning they have either accessed their bank account through a mobile Web browser, used a banking application or made a payment with a mobile device.

Among all mobile phone users, the use of mobile banking has climbed during the past few years, and more than half of smartphone users reported using mobile banking in 2013. While the security of such activity remains a top concern among consumers, it seems mobile banking will continue to grow more popular, with the potential to fill the void unbanked and underbanked consumers may feel as a result of their current access to financial services.

Banking Alternatives

But access doesn’t seem to be the primary issue. Of the unbanked consumers surveyed by the Fed, only 1% said they didn’t have an account because banks do not have hours or locations convenient for them. A quarter of respondents said they didn’t have enough money for an account, and 24% said they didn’t want or need an account.

Prepaid cards are the most common type of financial services used as an alternative to banking. Among survey respondents, 22% said they used some type of prepaid card, and 6% said they use payday loans. Prepaid cards offer many of the conveniences of checking accounts, debit cards and credit cards (such as direct deposit, ATM withdrawal and online payments). Cardholders also have to pay fees for a variety of things like having a low balance, reloading the card and making cash withdrawals, depending on the card. Consumer protections on these cards can be limited in comparison to those of credit cards, as well.

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