15 percent of Canadians are ‘underbanked’ — here’s what that means and why it’s a barrier to equitable recovery

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When Peter Jongeneelen went through a separation and divorce, he stood at the foot of a mountain of finances. There was child support and his own bills to pay – all while trying to start a new life. He was living paycheck to paycheck at the time, sometimes unable to afford his hydro bill in the middle of winter. Jongeneelen filed for bankruptcy. 

Not long after, Jongeneelen was diagnosed with peripheral dispersion glaucoma, a partial sight disability, which worsened his situation. Many of the regular jobs he was used to, including working in restaurants and the fishery industry, were off the table. He had to take what he could get to make ends meet. 

Jongeneelen didn’t have a well-functioning computer at the time, but the divorce court insisted that communication regarding divorce matters like visitation rights should be done over email. 

A friend of his suggested using EasyHome, Canada’s largest lease-to-own company, where he could get a computer. Acting in the same spirit as most payday loans, EasyHome charged massive interest rates for the products they sold. Though the computer Jongeneelen got only cost $500, he ended up paying about $850 with interest. 

“Not the smartest thing to do, but at the time because of all the other expenses, I didn’t have the money in the bank. And because of the bankruptcy that I went through, traditional banks would not even look at me,” says Jongeneelen. 

Like Jongeneelen, many Canadians have fractured relationships with banks. 

Financial institutions are designed in a way that often assumes everyone has the resources that come with a middle-high income. As a result, the products and services offered are geared towards this population. 

Adam Fair, vice president of strategy and impact at Prosper Canada, a national charity that promotes financial empowerment for Canadians, explains that there is a lack of understanding around the financial challenges faced by individuals who fall into a lower income bracket. Those with lower incomes often have high interest rates, face insufficient fund fees when they don’t have enough money in their account, go into overdraft and get hit with more fees. 

“It’s kind of counterintuitive, but those living on low-income relatively have the most expensive financial services costs,” says Fair. 

Who is underbanked in Canada?

Research shows that 15 percent, or close to five million Canadians, are underbanked, and three percent are completely unbanked, meaning that they have very limited or no access to financial services within the traditional banking sector. 

Ironically, underbanked individuals often come from low-moderate income backgrounds which put them at a higher need for accessible financial services. However, factors like low credit scores, high credit card fees, and non-sufficient fund fees are major barriers that shut Canadians out from banks.

Instances of explicit racism while banking, which include being handcuffed when trying to open a bank account, have further diminished the trust in banks for many Black, Indigenous and people of colour.  

A 2020 report by DUCA Impact Labs found that customers with low credit “undeniably face barriers to accessing financial products,” while only “16 percent of lenders say they have a systematic process for accommodating customers with poor credit.” Additionally, one-third of lenders say those with poor credit receive little or no service.

So what happens to those that are shut out from banks? As these populations still need some form of financial services, they are forced to find another way of managing and accessing money. However, the most common banking alternatives are often debt-traps. 

“The unique needs that we’re learning low-income individuals have are short-term loans to cover the ebbs and flows of people’s financial lives — and that product doesn’t really exist in any sort of scaled way through mainstream institutions and therefore, individuals often have to find themselves going to things like high-cost lenders and payday loans,” says Fair. 

How being underbanked leads to worse financial health 

Payday loans are one of the more prevalent forms of alternative banking that individuals can access when they need money fast, and can’t access financial services from banks. People who may be short a few hundred dollars on their rent money can go to payday lenders (from their many storefront locations or online) and get up to $1,500 in a single loan.  

These loans cost approximately $17 per $100 borrowed but can add up to an astounding interest rate of 442 percent annually. While some borrowers might not be aware of the enormity of the interest rates, and how much it can add up over time, those who are aware may still choose to get payday loans because it is their only option. 

These loans create a vicious cycle of debt and make it harder for communities to grow their assets, move out of poverty, and secure that financial stability.

Additionally, mortgages, credit cards and lines of credit continue to be the most common forms of debt, according to the DUCA Impact Labs’ report. “Credit card debt remains the most common form of non-mortgage debt, while payday loans, student loans, and private loans are among the most difficult to shed,” states the report. 

ACORN Canada, a community union of low-moderate income Canadians, has carried a strong national campaign to end predatory lending since 2005. In their fight for fair banking, they’ve held rallies, and conducted research studies to show the prevalence of this issue. 

Among ACORN’s demands are lowering the federal criminal interest rate from 60 percent to 30 percent, which should include all associated lending costs like fines, fees, penalties, and insurance. Payday lending, however, has been excluded from the current criminal interest cap. 

Canada’s 2021 federal budget stated that there will be a consultation and discussions around lowering the criminal rate of interest in the Criminal Code of Canada. However, there hasn’t been any notable action yet. 

What does an equitable financial future look like?

The simple solution to the issue of payday loans might be to get rid of them altogether. But Narinder Dhami, executive lead of New Power Labs, an organization seeking to grow capital for marginalized communities, explains that the situation is more complicated than that. 

“I think they’re known as predatory but they also play a role for some individuals and their livelihoods and the ability of access to capital…So just because I deem it predatory or the broader sector deems it predatory, it doesn’t mean [payday lending] doesn’t play a critical role for folks who need access to capital immediately,” says Dhami. 

Jongeneelen agrees and adds that the focus should be on primarily lowering the interest rate for payday lenders which people will continue to use, and lowering fees within banks like non-sufficient funds (NFS) to $10 instead $45-50. 

“Those unexpected costs, it’s putting low and moderate income people more and more into a hole and into difficult situations,” says Jongeneelen, adding that people shouldn’t have to be strapped when it comes to paying their rent or groceries because of high fees on their loans. 

Jongeneelen also highlights the need for the federal government to invest in banking alternatives like postal banking — a banking system that operates out of a post office with lower fees and higher accessibility for those in remote communities. 

There are also several innovative pilot projects and alternative banking initiatives that seek to design financial services specifically for those low-moderate income folks. Vancity Fair & Fast Loan, for example, is a payday loan alternative through which individuals can borrow $100 to $2,500 with a 19 percent fixed interest rate. 

Dhami says in the last few years, she’s come across entrepreneurs working toward financial inclusion by creating new models of credit scores or group lending that address the barriers faced by certain communities.

“The challenges for those that are creating products that are not predatory and they’re supportive to communities that are underbanked is how do we ensure that the awareness of those products is as high as awareness of things like payday lending?” 

The solution, Dhami says, is getting these types of banking alternatives that are just as accessible, just as convenient and widespread across Canada so that they can support communities that need them the most. 

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