What is a banking desert?
Banking deserts are places that lack adequate banking services. They are typically located in rural areas because they are less densely inhabited, providing fewer profit potential for large institutions. Low-income and elderly people are particularly prone to the problems connected with banking deserts. Residents are “vulnerable to predatory financiers and pricey cheque cashers” when basic banking services are unavailable.among the United States, banking deserts are more prevalent among communities of colour than elsewhere.
A “banking desert” is a geographical location with limited access to conventional banking facilities and financial organisations. Individuals and communities in these places frequently encounter barriers to accessing fundamental financial goods and services including savings and checking accounts, loans, and credits.
Living without access compared to conventional banking is not only difficult, but also unaffordable in today’s market. The expenses of being unable to readily cash checks, open deposit accounts, and obtain loans add up. Here’s what you need to know about banking deserts as well as what you may do if you live in.
History of banking desert
Tullio Martello and Augusto Montanari discussed banking deserts in their book, “Stato attuale del credito in Italia e notizie sulle istituzioni di credito straniere,” published in the 1870s during the Italian unification.The word was also used to characterise the scenario in Newfoundland and Labrador between 1993 and 2003, when the Canadian provinces lost 23% of their bank branches.
Bank deserts have increased in the US during the 1990s. Because of federal privatisation, mainstream banking institutions were able to focus their efforts on more densely populated and profitable locations while closing banks that did not generate a lot of revenue, which were typically located in low-income towns and places populated by people of colour. Other financial services, such payday lenders and check-cashing establishments, were able to take over these areas due to their higher prices.During the Great Recession, the number of banking facilities in the US peaked at 99,163 and decreased to 88,070 by 2018. Non-white communities in major cities including Baltimore, Chicago, Philadelphia, Detroit, and Las Vegas have seen the greatest bank closures.
Citizens find it far more difficult to develop wealth, credit, and saving when they only have access to pricey alternative services and no physical banks nearby.Furthermore, children raised in banking deserts are not as prone to be exposed to families and other adults who use local banks for financial transactions, increasing their risk of being financially illiterate as they grow older.According to a 2020 Making Sen$e article, Native American reservations with banking deserts have low credit scores due to financial illiteracy and distrust of banks.
Why are there no banks in your area?
Several reasons contribute to the formation of banking deserts:
Rural or remote places may have reduced access to financial services due to being far from urban centres, where banks are more typically found.
Banks may be less likely to open branches in low-income neighbourhoods due to worries about profitability and perceived hazards.
Residents in areas with inadequate infrastructure and transportation choices may have access to fewer banks or ATMs.
Bank branch closures can occur due to economic factors, especially in low-traffic areas. This may leave people with fewer possibilities for receiving banking services.
As banking services grow more digital, those without reliable internet connectivity or technological proficiency may struggle to use online banking options.
What to do if you don’t have access to a bank
If you or somebody you know resides in a banking desert, you can take a number of steps to meet your financial needs:
Consider alternative banking options, such as credit unions, financial institutions for community development (CDFIs), or local cooperatives.
Explore traditional banks’ internet and mobile banking offerings. These can assist bridging the gap if there are no actual branches nearby. Additionally, online-only banks provide attractive interest rates and charge structures. Look for reliable online banks that provide the services you require.
Use payment mobile apps: Without banking access, you may face hefty fees for basic financial activities like cheque processing and money orders. Mobile payment apps such as Venmo, PayPal, and the and Cash App allow you to manage payments without relying only on traditional banking systems.
Remember that, while banking deserts might be difficult to navigate, there are often options to assist you manage your funds. It is critical to conduct extensive research and make educated decisions according to your own requirements and circumstances.
Key Challenges of Banking Deserts
Banking is a recurrent transaction involving a lender and a customer. As a result, banks must be easily accessible to their clients. When they aren’t, consumers incur a variety of consequences. For example, banking deserts deplete consumers’ most valuable asset: time. When banks are not conveniently located, consumers are compelled to drive long distances to meet their financial needs, such as making a deposit, obtaining a mortgage, or even getting a new sheet of checks.
Yes, internet banking is an appealing alternative, but many people lack the computer literacy to bank securely online. Indeed, many elderly customers have spent all of their lives relying on friendly tellers at banks to handle their money, instead of using a smartphone, computer, or tablet. While convenience is sometimes the first victim of banking deserts, deteriorating financial habits follow quickly after. After example, when consumers are unable to visit an actual bank branch, they risk losing access to services that encourage financial knowledge and freedom. Banking deserts often lead to worse consumer credit scores. This is especially true on Native American bookings, where the closest banks are sometimes more than 30 miles distant.
Research indicates that Native Americans who grew up in bank deserts have worse financial knowledge and less trust in bankers.[and] developed poorer credit histories, a permanent disadvantage.” Such issues are also prevalent among entrepreneurs that rely on banks to obtain financing. According to James Angel, a finance professor at Georgetown University, banking deserts render it more difficult for struggling startups in the area to conduct financial transactions. Whether it’s getting change for their customers or obtaining a small-business loan to finance their goods, it’s basically making it difficult for small-town America to prosper.” Finally, banking deserts harm consumers’ financial interests at all levels.
What’s the effect of bank deserts ?
Bank accessibility, often known as branches density or distance, is connected with an area’s economic and demographic mix. According to a 2016 research by the Federal Reserve Bank of New York, it was found that bank deserts have historically prevailed in low-income and non-white areas, limiting access to banking services for these communities.
Areas without branches of banks pose a number of issues. These include difficulties with basic financial transactions such as opening an account, transferring funds funds, and obtaining loans. Furthermore, a lack of exposure and access to financial products and services has long-term consequences, including lower financial literacy amongst low-income households, which can lead to poor financial decisions.
Iowa State University conducted a study on two Native American reservations to assess the impact of access to local banking institutions. According to the study’s findings, people who live on the reserve and have limited or no access to financial institutions are 20% less likely to possess a credit report, have 7 to 10 points worse credit ratings, and have between two and four percent higher delinquencies. According to the study, a lack of exposure has an influence on financial literacy as well as trust in banks.