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Meaning Of Banking Desert
Banking desert refers to census tract or neighbourhood having no bank branches situated within it or within 10 miles radius of its centre. These are simply the areas where there is no existence of branch banking. Banking desert are more generally found in rural areas as compared to urban areas. This is because population residing in rural areas is very less, thereby limiting the profit generating opportunities for large financial institutions. Banking desert possesses great difficulty for peoples that are basically low-income residents and elderly to carry out basic financial tasks such as bill payments or depositing check. When basic financial services are unavailable to these peoples, they become more vulnerable to pricey check cashers and predatory lenders.
The banking desert are caused due to number of factors including the shut down of underperforming banking units, bank failures, loss of population and increase in shift towards digital banking as compared to branch banking. The financial crisis of year 2008 also resulted in formation of 86 banking deserts in rural areas as thousands of bank branches across United States were shut down. An aftermath of 2008 financial crisis was very severe such that around 6,008 out of total 95,018 bank branches were lost in between 2008 and 2016. Minorities were the one that gets majorly affected as 25% of all closures took place in majority-minority census tracts.
Negative Impacts of Banking Desert
Banking deserts can be very problematic for population who resides in such areas due to number of reasons. First one among them is proximity to the basic financial services. If an individual is willing to deposit or withdraw or wish to apply for loan, then they need to drive for hour or even more to reach their closest bank branch.
Apart from this logical aspect, lack of banking services makes it more difficult for individuals to develop good financial habits. The people may also have low rates of financial literacy because of non-exposure to banking system. All these would make the understanding of basic financial concepts such as budgeting, saving and building credit very difficult. Overall, it can be said that absence of physical banks nearby makes it much harder for citizens to build their wealth, credit and savings via utilizing only the expensive alternative sources.
Banking Deserts vs Unbanked
Around 7.1 million households or 5% of United States population is believed to be unbanked meaning that they do not have any bank account. And, another 13% of United States population is underbanked, meaning they are having bank account but still utilizes the alternatives financial services such as check cashing services and payday loans.
Whether a banking desert leads to higher proportion of underbanked and unbanked people in an area or not, is proved wrong according to researches done. Instead, research suggested that physical proximity to banking branches is not what makes people to remain unbanked.
People may choose not to opt for banking accounts may be due to the following reasons: –
- Banking is perceived as too expensive service.
- They don’t trust banking systems or government oversights of system.
- People don’t possess any documents, therefore believe won’t be able to open a bank account in U.S.
- Primary language spoken by them is other than the English and find it difficult to overcome barriers of language while using banking services.
- They are not able to open traditional bank account due to past banking mistakes resulting in negative ChexSystems report.
All these can just be few of the reasons due to which people avoid banking accounts, regardless of fact whether they reside in banking desert or not.
History of Banking Desert
The term ‘Banking Desert’ relates to early 1870s, when it was mentioned by Augusto Montanari and Tullio Martello in their book – Stato attuale del credito in Italia e notizie sulle istituzioni di credito straniere, concerned with Italian unification. It was used to define Newfoundland and Labrador’s situation in between the period of 1993 to 2003, when around 23% of Canadian provinces banking branches got lost.
Since 1990s, the concept of banking deserts has been growing in U.S. The mainstream banking firms due to de-regularized federal system were paying more attention on more profitable and populated areas. All banks not producing enough revenue were shut down and these were generally in low-income communities and places involving peoples of colour. This eventually resulted in establishment of high-priced alternative for financial services such as check cashing stores and payday lenders. During great recession, the bank branches in U.S. peaked to 99,163 that by year 2018 fell down to 88,070. Major cities such as Las Vegas, Chicago, Detroit, Baltimore and Philadelphia close down the bank branches that were in non-white areas.