WTF is a banking desert? – Tearing


Bank deserts are geographic areas where no bank exists within a 10 mile radius. The Federal Reserve of St. Louis identified 1,132 banking deserts in the United States in 2014, including 734 in rural areas.

The phenomenon of banking deserts emerged as a result of the federal deregulation of banks in the 1990s, as a result of which many banks closed branches that generated low incomes – often in rural and less populated areas. In other cases, when large national banks acquired and merged with smaller local banks, bank branches became redundant due to mergers and acquisitions. As large banks have acquired local and community banks, some branches have closed, including many unprofitable branches in low income areas.

Another wave of widespread bank closings was seen after the 2008 financial crisis, when around 5,000 US bank branches closed. The pandemic has also resulted in branch closures and, according to S&P Global, U.S. banks closed 3,324 bank branches across the country in 2020.

Source: Federal Reserve Bank of New York

What is the effect of banking deserts?
Accessibility to banks – otherwise known as branch density or distance – is associated with the economic and demographic makeup of a region’s population. A 2016 study published by the Federal Reserve Bank of New York reported that banking deserts have historically existed in low-income, non-white areas, worsening access to financial services for these populations.

Areas without bank branches present various problems. These include challenges with rudimentary financial tasks such as opening an account, depositing and withdrawing funds, and applying for loans. In addition, lack of access and exposure to financial services has lingering effects, including a decline in financial literacy among low-income households, which can lead to poor financial decisions.

A study by Iowa State University compared two Native American reservations to assess the effects of accessing local financial institutions. Research results found that people living on-reserve with little or no financial institutions were 20% less likely to have a credit report, had credit scores 7-10 points lower, and had lower rates. 2 to 4% higher delinquency. The study noted that lack of exposure has an impact on financial literacy and an individual’s confidence in financial institutions.

What happens when a bank branch leaves an area?
A county commissioner in Shreveport, Louisiana faced a difficult situation when a bank branch closed in his area. The commissioner told NPR he learned that a senior in his county had lost a bank that he had frequented for decades and that, like many others in his community, the digital switch-back was not an option for her.

“She has to depend on a taxi or someone to pick her up and take her where she is going. But now she has to get them to pick her up and take her completely out of the neighborhood to do her banking, ”he said.

As some people switch to digital and mobile banking, the inaccessibility of the internet and lack of digital literacy in rural areas could also hamper the transition to mobile banking.

The vacuum created by the lack of bank branches in an area often opens the way for alternative financial service providers (AFSPs) such as pawn shops, cashier shops, and payday lenders who offer banking services. cashing checks, depositing checks and withdrawing cash, among others. However, these services come at high costs and additional fees, preventing low-income households from building wealth and establishing a credit history. For example, payday lenders offer loans with interest rates of up to 600%. They also encourage repeat borrowing, which can create a vicious cycle of indebtedness among clients in low-income communities.

A study by the University of California at Berkeley found that closing a bank branch resulted in a 13% decrease in the number of small business loans granted in a geographic area, hampering economic growth in an area already in low income. Lack of access to capital can have a direct impact on financial opportunities for residents of an area. Small businesses that are the driving force of the local economy lose access to loans and therefore the ability to open or expand their businesses.

What about credit unions and ATMs?
In areas without a bank branch, credit unions have been established to serve low-income communities, quickly filling the void left by banks in some cases.

The small town of Itta Bena, Mississippi, saw its last bank branch closed in 2015, according to NBC. The physical infrastructure of the bank – both the building and the ATM – was donated to Hope Credit Union, which then worked to provide access to financial services to the local population. Although many residents have joined them, Itta Bena’s economic growth has remained stagnant. Additionally, residents have reported that the ATM operated by Hope is often cash strapped, forcing them to use other ATMs that charge a fee for each transaction.

Unlike banks that seek to maximize their profits, credit unions are tax exempt and not driven by profitability, so more likely to stay in a less populated area. Likewise, ATMs can perform many tasks performed by a bank and both are considered alternatives to a bank branch in a banking desert.

ATMs are also left to meet many of the cash needs of area residents. However, they cannot offer many other financial products such as loans, mortgages, and financial advice. Since ATMs also offer a digital experience, they are difficult to use for people with low digital literacy, especially the elderly.

What about Walmart?
With a network of 4,700 stores across the United States, Walmart is America’s largest retailer, interacting with millions of Americans every day.

Walmart has a long history of offering a variety of financial products and services. MoneyCard, issued by Green Dot Bank, is a debit card that can be used for purchases and used as a substitute for a bank account. In partnership with Affirm, Walmart allows customers to shop now and pay in installments later. Walmart also provides its customers with services such as money orders, check cashing, wire transfers and bill payment.

Do banks offer creative models to avoid banking deserts?

Other ways to cut costs and keep a branch in an underbanked community are to combine banks with other small businesses in the community or use a community space to house a bank. Bankaurants, a bank branch integrated into a local restaurant, is one such idea that allows banks to share space with a business. Customers can meet with a bank representative while waiting for a meal and order financial products, much like ordering food in a restaurant.

Banks are also looking for alternatives to completely leave the communities. An example is the concept of co-working, i.e. several banks share the same premises and divide the cost of running a branch.

In banking hubs in England, a different bank occupies a shared space each day of the week, allowing customers to do their banking with their respective bank at least once a week. In the city of Rochford, Essex, Barclays, Lloyds, Santander, HSBC and NatWest are all clustered in one place in a previously under-banked community.

Some communities in a banking desert have offered community spaces to banks to ensure that their community once again has a bank branch. One such example is the small town of Wilmington, Delaware, where community efforts prompted the Del-One Federal Credit Union to establish a branch inside a former elementary school.

Is digital banking a real solution?

The trends observed in the pandemic seem to suggest so. A recent study by JD Power reported that in 2019, digital-only consumers represented 30% of consumers. That number rose to 41% after the pandemic.

The increased use of digital banking during the pandemic lends credence to the claim that online banking can bridge the gap between the unbanked and access to financial services in banking deserts. As visits to physical bank branches became more difficult during last year’s pandemic, 3 in 4 Americans turned to online banking for daily banking tasks, according to an Ipsos-Forbes survey. Therefore, in the absence of physical banking services due to closures or reduced banking hours, mobile banking offered a viable alternative to customers across the United States.

The argument that physical bank branches are essential, since they help foster personal relationships through interpersonal interactions between bank representatives and customers, is also disputed. Video conferencing features introduced by a number of banks during the pandemic allow customers to speak personally to a bank representative in the absence of a physical branch.

Likewise, interactive ATMs that can connect customers to a live agent through video conferencing or phone calls can help customers meet many of their banking needs. ITMs offer human interaction and a digital experience, while also offering many services in the absence of a physical bank branch.

While some might argue that the digital transition does not necessarily reflect a shift among populations residing in banking deserts, a 2019 Federal Deposit Insurance Corporation survey suggested otherwise. The FDIC survey indicated that the most common method of accessing a bank account for underbanked households was through mobile banking.

While the data seems to suggest that the digital switchover is happening gradually and has been accelerated by the pandemic, its viability to replace physical bank branches still remains ambivalent.

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