A large number of Americans do not have bank accounts (the ‘unbanked’) or rely on costly alternative financial services (AFS) such as payday loans (the ‘underbanked’), with implications for wealth accumulation and retirement preparedness. Using primary data, we document large racial/ethnic differences in unbanked and in frequent AFS usage rates. We study the role of socio-economic status (SES), financial literacy, trust in financial institutions, networks, and time preferences in explaining these gaps. While these variables explain a large fraction of the white-minority gaps in unbanked status the same is not true for gaps in AFS use. A Blinder-Oaxaca decomposition confirms these patterns: gaps in unbanked status are mostly explained by differences in endowments across groups, for AFS gaps differences in returns to endowments have the largest explanatory power. Our findings suggest that, while related, unbanked and underbanked are distinct concepts with different underlying causes that may require different policy responses.