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WTF is a banking desert?

  • Bank deserts exist in areas without banks.
  • Access to financial services has a sociological and financial impact on people.

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WTF is a banking desert?

Banking deserts are geographic areas where no banks exist within a 10 miles radius. The St. Louis Federal Reserve bank identified 1,132 banking deserts in the United States in 2014, 734 of which were in rural areas. 

The phenomenon of banking deserts emerged in the aftermath of the federal deregulation of banks in the 1990s, following which many banks shut down branches that were generating low revenue -- often in rural, less populated areas. In other cases, as large, national banks acquired and merged with small, local banks, bank branches became redundant due to mergers and acquisitions. As large banks acquired local and community banks, some branches closed, including many non-profitable ones in low income areas.

Another wave of widespread bank closures was observed after the financial crisis of 2008, when an estimated 5000 American bank branches shut down. The pandemic also resulted in branch closures and according to S&P Global, U.S. banks closed 3,324 bank branches nationwide in 2020.

Source: Federal Reserve Bank of New York

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

Areas without bank branches present a variety of problems. These include challenges with rudimentary financial tasks like opening an account, depositing and withdrawing funds, and applying for loans. Additionally, lack of access and exposure to financial services has persisting effects, including reduced financial literacy among low-income households that can engender poor financial decision-making.

A research study by Iowa State University compared two Native American reservations to gauge the effects of access to local financial institutions. The findings of the research reported that individuals living in the reservation with limited or no financial institutions were 20 percent less likely to have a credit report, had 7 to 10 point lower credit scores and had 2 to 4 percent higher delinquency rates. The study noted that the lack of exposure impacts financial literacy and an individual’s trust in financial institutions.

What happens when a bank branch leaves an area?
A county commissioner in Shreveport, Louisiana faced a predicament when a bank branch closed in his area. The commissioner told NPR that he learned about an elderly constituent of his county who lost a bank she had been visiting for decades and like many others in his community, reverting to digital was not an option for her.

“She has to depend on a taxi or somebody to pick her up and take her where she's going. But now, she has to have them pick her up and take her completely outside of the neighborhood to go and get her banking done,” he said.

While some individuals switch to digital and mobile banking services, internet inaccessibility and lack of digital literacy in rural areas could also impede the transition to mobile banking services.

The void created by the lack of bank branches in an area often paves way for alternative financial services providers (AFSP) such as pawn shops, cash checking stores and payday lenders that offer check cashing, check deposit, and cash withdrawal services among others. However, these services are offered at high costs and additional fees, preventing low-income households from building wealth and establishing a credit history. For instance, payday lenders offer loans with interest rates as high as 600 percent. They also encourage repeat borrowing, which can create a vicious debt cycle among customers from low-income communities.

A study by University of California at Berkeley found that closure of a bank branch led to a 13 percent decrease in the number of small business loans made in a geography, dampening the economic growth of an already low-income area. 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 hence the ability to open or grow their businesses.

What about Credit Unions and ATMs?
In areas without a bank branch, credit unions were built to serve low-income communities, quickly filling the vacuum left by the banks in some instances.

The small town of Itta Bena, Mississippi had its last bank branch closed down in 2015, according to NBC. The physical infrastructure of the bank -- both the building and the ATM -- were donated to Hope Credit Union, which then worked on providing access to financial services to the local population. Although many residents joined, economic growth in Itta Bena remained stagnant. Moreover, residents reported that the ATM operated by Hope often runs out of money, leaving them to use other ATMs that charge fees with each transaction.


Unlike banks that seek to maximize profits, credit unions are tax-exempt and not driven by profitability, hence more likely to sustain in a less populated area. Similarly, ATMs can perform many of the tasks performed by a bank and both are seen as alternatives to a bank branch in a banking desert.

ATMs are also left to fulfill many of the cash needs of the residents of the area. However, they cannot offer many other financial products such as loans, mortgages and financial consulting. Since ATMs also offer a digital experience, they are cumbersome to use for individuals with low digital literacy especially senior citizens.

What about Walmart?
With a network of 4,700 stores across the U.S., Walmart is the biggest retailer in America, interacting with millions of Americans each day.

Walmart has long offered 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 lets customers shop now and pay in installments later. Walmart also provides its customers with services like money orders, check cashing, wire transfers, and bill payment.

Are banks coming up with creative models to prevent banking deserts?

Other ways of cutting costs and retaining a branch in an underbanked community are combining banks with other small businesses in the community, or utilizing community space to house a bank.. Bankaurants, a bank branch embedded within a local restaurant, is one such idea that allows banks to share space with a business. Customers can meet a bank representative while waiting for a meal and order financial products, much like placing an order for food in a restaurant. 

Banks are also looking for alternatives to leaving communities completely. One such example is the concept of co-working, that is multiple banks share the same premises and divide the cost of running a branch.

In bank hubs in England, a different bank occupies a shared space each day of the week, allowing customers to bank with their respective bank at least once in a week. In the town of Rochford, Essex, Barclays, Lloyds, Santander, HSBC, and NatWest are all housed in one location in a previously underbanked community.

Some communities in a banking desert have offered community spaces to banks in order 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 an old elementary school.

Is digital banking a real solution?

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

The increased usage of digital banking during the pandemic gives credence to the assertion 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 harder during the pandemic this past year, 3 in 4 Americans turned to online banking for everyday bank tasks, according to an Ipsos-Forbes survey. Hence, in the absence of physical banking due to closures or reduced banking hours, mobile banking offered a viable alternative to customers throughout the U.S.

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

Similarly, Interactive Teller Machines that can connect customers to a live agent via video conferencing or telephone calls can help customers fulfill many of their banking needs. ITMs offer human interaction and a digital experience, at the same time offering many of the services in absence of a physical bank branch.

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

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

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