What is a banking desert?
A banking desert is a census tract or neighborhood that has no bank branches within or within 10 miles of its center. Economists at the Federal Reserve Bank of New York have identified 1,214 banking deserts in the United States, the majority of which are located in sparsely populated areas. Twenty-three percent of all banking deserts are located in Metropolitan Statistical Areas (MSAs) while the rest are in rural areas. Some MSAs, like New York and Boston, have no banking deserts.
Key points to remember
- A banking desert is a census tract that has no bank branches within or within 10 miles of its center.
- The majority of banking deserts in the United States are located in rural areas, with less than 25% located in metropolitan statistical areas (MSAs).
- Banking deserts are not necessarily related to the proportion of unbanked and underbanked people in that area, i.e. people who do not have a bank account or who have a bank account but are also dependent alternative financial services.
- A number of factors can cause banking deserts, including the closure of branches deemed underperforming and increased access to digital banking services.
Understanding the banking desert
Banking deserts are areas where access to bank branches is non-existent. There are different reasons why a banking desert can exist. For example, the creation of a banking desert can result in:
- Closure of branches identified as underperforming
- Banking loopholes
- Population losses
- Increase in demand for digital banking coupled with decline in demand for bank branches
The 2008 financial crisis and its consequences led to the closure of a number of banks. A total of 6,008 out of 95,018 branches were lost between 2008 and 2016, leading to the creation of 86 new rural banking deserts during this period. These banking wildernesses have disproportionately affected minorities, with 25% of all closures occurring in majority-minority census tracts.
Proportionally speaking, urban areas experienced a higher percentage of branch closures as a result of the financial crisis, but were less likely to develop banking deserts.
Disadvantages of banking deserts
Banking deserts can be problematic for people who live there for a number of reasons. The first problem is proximity. If someone needs to deposit or withdraw or apply for a loan, for example, they may need to drive an hour or more to reach the nearest bank branch.
Beyond the logistical aspect, the lack of banking access can make it more difficult to develop good financial habits. Lack of exposure to the banking system can lead to lower financial literacy rates. This in turn can make it harder to understand basic financial concepts, such as budgeting, saving, and building credit.
Opening an online bank account can help build a solid foundation of financial knowledge, including learning how to track expenses and manage expenses for budgeting and the value and importance of saving regularly.
Banked and unbanked deserts
An estimated 5% of the US population, or 7.1 million households, are unbanked, meaning they don’t have a bank account. In the United States, 13% of people are underbanked, meaning they have a bank account but also use alternative financial services, such as payday loans and check cashing services.
As to whether banking deserts result in a higher percentage of unbanked and underbanked people in this region, the answer appears to be no. Research suggests that physical proximity to bank branches is not what causes some people to remain unbanked.
Instead, people may choose not to have a bank account because they:
- Perceive banking services as too expensive
- Believing they are unable to open a traditional bank account due to a past banking error that resulted in a negative ChexSystems report
- Distrust of the banking system or government oversight of the system
- Speak a primary language other than English and have difficulty overcoming language barriers when accessing banking services
- Are undocumented and do not believe they can open a bank account in the United States
These are just a few of the reasons people may choose to avoid bank accounts, whether or not they live in a banking wilderness.
What are the causes of a banking desert?
A number of factors can lead to the creation of a banking desert, including the closure of underperforming branches, an increased movement towards digital banking rather than branch banking, and loss of population. The 2008 financial crisis also led to the creation of 86 banking deserts in rural areas, with thousands of bank branches across the United States being closed.
Where are the banking deserts located?
The majority of banking deserts are located in rural and desert areas, including large parts of the southwest. For example, a number of banking deserts are concentrated in southeastern California, Arizona, and Nevada.
What is unbanked?
Being unbanked means you don’t have a bank account. About 5% of the US population is unbanked. Underbanked people have at least one bank account, but also use alternative banking services, such as check cashing services or payday lenders. An estimated 13% of the population is underbanked.
Banking deserts can make it harder to perform basic financial tasks, such as paying bills or depositing checks, but digital banks can be a solution. Digital banking aims to help fill this gap for people who may live in areas where there are no nearby bank branches. Another advantage of digital banking is that online banks can be more user-friendly while offering higher interest rates on deposit accounts. Online bank accounts are also relatively easy to open, which can help alleviate some of the impacts of living in a banking wilderness.