This Is What Banking Desert Means

What Is a Banking Desert?

Ever heard of a “banking desert”? It’s a term coined for a neighborhood or census tract that doesn’t have any banks within its boundaries or within a 10-mile radius from its center.

Research conducted by economists from the Federal Reserve Bank of New York uncovered a total of 1,214 such areas in the United States. Interestingly, most of these deserts are situated in sparsely populated regions.

Surprisingly, around 23% of these banking deserts can be found within Metropolitan Statistical Areas (MSAs), though the larger share exists in rural settings. Fascinatingly, certain MSAs like New York and Boston boast no banking deserts at all.

Key Points to Remember

1. This term is defined by the U.S. census as a zone without any bank branches within the area or within a 10-mile radius from its core.
2. The majority of these deserts are in rural landscapes, with less than a quarter situated in Metropolitan Statistical Areas (MSAs).
3. Interestingly, the existence of banking deserts isn’t always correlated with the number of unbanked or underbanked individuals in that particular area.
4. For those dwelling in these deserts, it means either lacking a bank account or relying on alternative financial services, such as check-cashing operations.
5. Several reasons contribute to these deserts, including the closure of branches deemed unprofitable and the rising availability of digital banking services.

Reasons Behind Banking Deserts

So, what causes these banking deserts?

They come about when access to traditional branch banking completely disappears.

Here are a few reasons why they might pop up:

1. Branch Closures: Sometimes, banks shut down branches that aren’t performing well, contributing to the emergence of banking deserts.
2. Bank Failures: When banks fail, it can lead to a void in banking services within certain areas.
3. Population Changes: If an area experiences a decline in population, it might prompt banks to close branches due to reduced demand.
4. Digital vs. Branch Banking: The rise in demand for digital banking, coupled with a decrease in people using traditional branches, also plays a role in creating these deserts.

Impact of the 2008 Financial Crisis

The aftermath of the 2008 financial crisis resulted in the closure of numerous banks. Shockingly, between 2008 and 2016, around 6,008 out of 95,018 branches shut down. This led to the creation of 86 new banking deserts in rural areas during that period.

Alarmingly, these closures affected minority communities significantly, with a staggering 25% of all closures occurring in areas predominantly inhabited by minorities.

Interestingly, while urban areas saw a higher percentage of branch closures due to the financial crisis, they were less likely to develop banking deserts compared to rural areas.

Cons of Banking Deserts

Living in a banking desert can pose significant challenges for the residents. Let’s break down a few of these hurdles:

1. Distance Dilemma: Imagine having to drive for an hour or more just to deposit money, withdraw cash, or apply for a loan.

That’s the reality for those in banking deserts. Alternatively, they might turn to online financial solutions like online-based lending or E-wallets, but this option requires some digital know-how.

2. Logistical Challenges: Beyond the inconvenience of reaching a physical branch, the absence of nearby banking services makes it tougher for individuals to cultivate good financial habits.

Limited exposure to the banking system can lead to lower financial literacy rates, making it harder to grasp fundamental concepts like budgeting, saving, and building credit.

3. Financial Literacy Struggles: Without easy access to traditional banking, residents may miss out on opportunities to enhance their financial knowledge.

This lack of exposure can result in lower levels of financial literacy, making it challenging to understand the basics of managing money.

4. Building a Foundation Online: To overcome these challenges, opening an online bank account becomes crucial. It serves as a gateway to building a strong financial foundation.

Through online banking, individuals can learn essential skills like tracking expenses, managing budgets, and understanding the value of regular saving.

Unbanked Population

About 5% of the U.S. population, roughly 7.1 million households, doesn’t have a bank account, making them ‘unbanked’.

Additionally, approximately 13% of the population is ‘underbanked’, meaning they use alternative financial services like payday loans and check-cashing despite having a bank account.

Interestingly, the presence of banking deserts doesn’t necessarily lead to a higher proportion of unbanked and underbanked individuals in an area. Studies indicate that mere physical proximity to bank branches doesn’t solely determine why some people remain unbanked.

Reasons for Unbanked Status

People might choose to forgo bank accounts due to various reasons, irrespective of living in a banking desert:

1. Cost Concerns: Some perceive banking as too expensive, discouraging them from opening accounts.
2. Past Banking Troubles: Previous banking mistakes resulting in negative ChexSystems reports might hinder individuals from accessing traditional bank accounts.
3. Trust Issues: Distrust in the banking system or government oversight can also deter individuals from banking.
4. Language Barriers: For those primarily speaking languages other than English, overcoming language barriers when dealing with banks can be challenging.
5. Undocumented Status: Individuals may believe they can’t open a bank account in the U.S. if they are undocumented.

To address this, many banks and credit unions provide ‘second-chance checking accounts’ to those previously denied traditional bank accounts.

FAQ

Definition of Banking Desert?

A banking desert refers to an area, be it a census tract or neighborhood, lacking any nearby banking branches within its confines or within a 10-mile radius. These deserts are more prevalent in rural areas compared to urban settings.

Reasons of Banking Deserts?

Several factors contribute to the formation of banking deserts:

• Branch Closures: Shutting down underperforming branches can contribute to the creation of these deserts.
• Digital Transition: A growing preference for digital banking over traditional branches has also played a role.
• Population Shifts: Changes in population, especially declines, may lead to branch closures due to reduced demand.

Location of Banking Deserts?

Most banking deserts are situated in rural and arid regions, particularly in the Southwest. Concentrated areas include southeastern California, Arizona, and Nevada.

Unbanked and Underbanked meaning?

• Unbanked Individuals: These are people without bank accounts, accounting for around 5% of the U.S. population.
• Underbanked Individuals: They possess at least one bank account but also rely on alternative financial services like check-cashing or payday lenders. This group comprises an estimated 13% of the population.

Final Thoughts

Living in banking deserts poses challenges in managing everyday finances, like paying bills or depositing checks.

However, digital banks offer a potential solution. They bridge the gap for individuals residing in areas without nearby bank branches.

Digital banking comes with several benefits. Online banks often feature fewer fees and higher interest rates on deposit accounts.

Moreover, opening an online bank account is relatively straightforward. This ease of access can alleviate some of the burdens of residing in a banking desert.

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