Related Links

• Banking Deserts Dashboard
• High and Dry: Banking Deserts Increased in the Fifth District During the Pandemic

Transcript

Tim Sablik: My guests today are Alaina Barca and Surekha Carpenter. Alaina is a community development research analyst at the Philadelphia Fed, and Surekha is a research analyst at the Richmond Fed. Alaina and Surekha, thanks for joining me.

Alaina Barca: Thanks for having us.

Surekha Carpenter: Thanks for having me.

Sablik: Today, we're going to be talking about banking deserts and their effects on communities that live in them. I think the best place to start is with a definition. Alaina, can you tell us what is a banking desert?

Barca: The term "banking desert" has been around for a while, but the actual definition of what a banking desert is has never really been that consistent. There's no set definition in research, besides in general that it's an area with no physical bank branches around.

For the last few years, we've been studying banking deserts at the Philadelphia Fed, specifically trends in bank branch closures and banking desert growth since the pandemic. We were interested in studying banking deserts using a definition that varied by the density of a place — traveling one mile in a city is often not the same thing as traveling one mile in a more rural area.

So, in our banking desert research, we define banking deserts based on Census tracts, which are areas with about 4,000 people in them. We call a given Census tract a banking desert if it doesn't have a physical bank or credit union branch within the area itself or within a certain radius from the population center. That radius varies based on the type of tract. If it's in an urban area, we draw a two-mile radius. If it's suburban, it's five miles and if it's rural, it's a 10-mile radius.

Sablik: You mentioned there's also been a long-running trend of a decline in the number of banks in the United States over the last several decades. Surekha, do you have any ideas about what might be driving that trend?

Carpenter: We've picked out several factors coming both from the banking sector side and from the consumer side.

On the banking sector side, there's been a trend of bank consolidation since the '80s and '90s, when regulation made that practice permissible and easier for them to do. Bank consolidation, which occurs through mergers and acquisitions, spiked during the Great Recession and then we saw another spike again during the COVID-19 pandemic. So that's one side of the story.

On the other side for the consumers, preferences for online and mobile banking have really been increasing, especially in the last decade. The FDIC Survey of Unbanked and Underbanked Households revealed that, in 2013, online or mobile banking was the primary method of bank account access for about 39 percent of surveyed households. That jumped all the way to 66 percent by 2021. So, very clearly, mobile banking is becoming much more popular as the technology improves.

Barca: I'll just add that trend that we've been seeing in bank branch decline since the Great Recession, it actually accelerated at the onset of the pandemic. In the first couple years of the pandemic, we were losing branches at about twice the pace than we were right before the pandemic. So, in addition to bank consolidation and online banking becoming more capable and popular, we saw a different type of change in demand at the beginning of the pandemic. People didn't want to visit their bank branch for safety reasons, which was a different kind of demand shift. It intensified that already reduced demand for in-person banking that we were already seeing.

Sablik: I want to follow up on that. I think some listeners might think, well, we're in an era where banking is increasingly digital. You mentioned mobile banking apps. Why might it still be important to have access to a physical bank?

Barca: Some consumers still prefer to bank in person more often than others, particularly lower-income, rural and older consumers as well as people with disabilities. People without full access to the tools that you need to completely switch to banking online — so those without broadband, high-speed internet, a device, or the digital skills to navigate the online banking platforms — might also rely on physical banks more often.

The reasons for going into bank branches still span quite a bit. People ask, well, if it's just for cash and transactions, why not just switch to ATMs? A lot of ATMs don't take large or any deposits, so small businesses [and] cash-heavy industries often rely on their bank branch to place their cash in a safe place at night. People visit bank branches for other services as well, seeking out financial resources like small business loans, mortgage options or counseling, or even just to learn more about the checking and savings account options that exist.

Some people just prefer to talk face to face with a banker. Banking has a history of being incredibly relationship based. While many consumers have transitioned to mostly or entirely banking online, there are still consumers who prefer to build or maintain relationship with a specific banker in order to feel comfortable and trust them in doing business with them.

Some people might not be heavily impacted by living in a banking desert, whether because they can pivot to online banking or traveling to a further branch is an option for them. For those that it does impact because they can't do those things, it could mean that they can't access banking services, and that could impact financial health if they can't easily access things like a savings account or loans that can build wealth, like small business loans or mortgages

Carpenter: This is all tied back to opportunities, opportunities to strengthen financial health and build wealth. We just want to be monitoring how equal that opportunity is across these different populations and across different geographies.

Sablik: Yeah, that is a good point — the importance of having access to physical bank is going to differ by consumer, by individual. Also, you mentioned geography there at the end. Did either of you find anything in your research that suggests the importance of having a physical bank branch differs by geography, that is to say, urban versus rural.

Barca: The importance was not exactly what we studied, but the importance could differ by geography. Rural consumers are more likely to prefer in-person banking, so not having access to a physical bank branch could have a bigger impact because of that stronger preference. It could also have a bigger impact if infrastructure is just more spread out in a place.

But not having access to a physical bank branch doesn't necessarily imply that someone doesn't have access to banking in general. It all depends on the consumers' needs and whether a physical branch is vital to whether they have banking access. When a person's bank branch closes, if they can't get to the next nearest branch and they can't do all the banking they need to do online or somewhere else nearby like an ATM, then having that physical bank branch nearby does matter for them. But that can impact people in urban, suburban or rural places.

Carpenter: For us at the Richmond Fed, we've been particularly focused on issues facing rural residents and communities. We have repeatedly been reminded in conversations that we've had and events that we've held that that physical space between rural residents and amenities or infrastructure can really be a major challenge.

This is no exception. Just as Alaina was saying, when people don't have access to that personal vehicle or public transportation, that really becomes a huge hurdle to accessing really any amenity in a community. Hospitals are one example, education and that kind of thing. It certainly is true for bank branches and ATMs.

Sablik: Are there any other community characteristics that are also important when it comes to evaluating the impact of a banking desert?

Barca: On top of the groups we've already talked about, we're also paying attention to historically unbanked and underbanked communities, so that includes people of color and people with disabilities. If living in a banking desert does have an impact for some consumers on their access to banking services overall, then this could have even bigger implications for communities that are already demonstrating lower or no access to banking across those other metrics.

Carpenter: In thinking about who is missing access to these physical banking locations, I think that it's helpful for us to assess what other characteristics we can combined with the Banking Desert Dashboard — for example, as Alaina had mentioned earlier, access to broadband access to mobile devices so that you can use the broadband access to financial literacy and education.

Sablik: Surekha mentioned the Banking Deserts Dashboard, which is a tool created by Fed Communities, a collaboration among the Board of Governors and all 12 Reserve Banks of the Federal Reserve System. That tool collects data on bank branch closings from 2019 to 2023, so from the pre-pandemic period into the recovery. What are some of the key trends around bank closures that that data reveals about this period?

Barca: Across the US, since the onset of the pandemic, the number of bank branches declined by 5.6 percent. The number of banking deserts increased by 217, so there were 3,618 banking deserts by mid-2023. The population living in banking deserts increased by over 760,000 during that time. As of mid-2023, the number of Americans living in banking deserts was about 12.3 million people.

The results are pretty nuanced. When we look across those different community groups that we've been talking about, the bulk of branch losses and desert growth during this period was in higher-income, suburban and predominantly White areas. But for places with high concentrations of lower-income, Asian, Black residents, places with higher rates of people with disabilities and racially diverse areas, they all lost branches at a disproportionate rate compared to the country overall. Majority Black areas also saw faster rates of increases in their banking deserts during that time compared to the national average, and people living in majority Native communities were 12 times more likely to live in a banking desert in 2023 compared to the national average.

Sablik: Surekha, how does the Fifth District compare to this national picture?

Carpenter: Thanks to Alaina and team for making the data available from this dashboard, that made it possible for us at the Richmond Fed to go in and pull information just from our states. What we found was mostly similar to the national story, but we did have a couple of small differences overall.

The Fifth District saw the number of banking deserts increased by 50 census tracts. Now that represented about a 10 percent increase in banking deserts compared to a 6 percent increase nationally. But the increases in banking deserts really looked different across all of our states.

For example, D.C. had no banking deserts in 2019 and they maintain that through 2023. West Virginia had 33 banking desert tracts in 2019 and 2023, so again no change. Maryland had a smaller number of banking desert tracts in 2019 — only 23 tracts — so when the number increased by five tracts, that really showed up as a large percent increase.

Where we really saw bigger increases were in North Carolina, South Carolina and Virginia. They both had higher numbers of banking deserts and they experienced relatively large percent increases between 2019 and 2023. Among our states, North Carolina really sticks out for its number of banking desert tracts, particularly which you can see represented graphically in our recent Regional Matters post.

Sablik: You mentioned places where banking deserts have grown, some places where they've stayed the same. Are there any places that have reduced their banking deserts in recent years?

Barca: Across the country, there have been places with reduced banking deserts, but they're very rare. Less than 4 percent of banking deserts in 2019 were what we call cured, meaning they gained one or more branches by 2023.

For the ones that were cured, they were mostly cured by the opening of a credit union or community bank branch, which reflects some of those overall trends that we saw in the data when we were looking across different types of institutions. The research showed that large and very large bank branch closures made up the bulk of the closures that we saw since the onset of the pandemic, while the overall number of branches for community banks and credit unions were relatively steady, if not increasing, during that time.

Sablik: Are there any lessons that we could take from those communities?

Barca: [There are] other strategies we've learned about since getting into this research, not necessarily curing any banking deserts but might help to fill some potential gaps in banking access for people living in banking deserts.

Micro branches are coming up more often, so setting up a branch that has a smaller footprint that may be a standalone building but could also be inside of a community building like a community center. Mobile bank branches are cropping up in rural and urban areas and they kind of work like food trucks. While they're full-service bank branches, they drive from location to location in designated places that might not have access to banking services otherwise.

Some institutions also are intentionally targeting their bank branch openings in banking deserts to serve those places that don't have enough physical banking options nearby. Others are working to move into a shuttered bank branch building. While communities would be banking with a different institution, they could still bank in the same exact place.

I'll also add that part of the strategies have been around improvements in online accessibility, too. There's been a larger push to focus on improving broadband access, especially in rural areas, and making online banking more accessible to everyone by improving websites and their functionality, especially for folks who are depending on working off a smartphone alone for their online banking.

There's quite a bit of innovation going on in the space as the retail landscape changes for bank branches. We need more research, though, on how effective any of these strategies actually are on closing those potential gaps in access.

Sablik: That's a great segue on the topic of further research. Maybe you could both talk a bit about how the Fed is using this data on bank closings and banking deserts, and maybe if there are particular things that you both are going to be watching over the coming year or maybe researching further in your own work.

Barca: Part of the Fed's dual mandate for both stable prices and employment involves striving for an economy that works for everyone. As part of that, we are going to continue to pay attention to these trends in bank branch closures and the potential impacts it might have on banking access, both nationally and regionally. We'll continue to track in our District where branches are closing, where deserts are forming, and also what kinds of creative response strategies that we're seeing, both locally and nationally, as folks continue to innovate in this space.

Carpenter: I'll echo what Alaina just said. From a research perspective in the Richmond Fed, we are going to continue to track and report on these trends in the banking sector, especially watching which areas are losing access to physical banking.

I'll mention too at the Richmond Fed, we do have that focus on rural initiatives, so we are hoping to understand the nuances better of those barriers. When the distances become so large in rural places between residents and their amenities, we would like to know from a policy perspective if there's anything that we can do to kind of help ameliorate that.

Last, I'll mention that the Richmond Fed runs the system's biennial CDFI Survey. CDFIs are community development financial institutions that are mission driven to serve the financially underserved. CDFIs tend to seek to fill these gaps that are being created in places like banking deserts. We're hoping to compare the banking desert map that Alaina's team created with a map of CDFI coverage and locations across the country so that we can just better understand where do people have access to physical banking locations, and what is their true access to credit or financial resources.

Sablik: That's right. Listeners can check out an earlier episode, Surekha, that you did on CDFIs.

Alaina and Surekha, thanks so much for joining me today and sharing your insights on this topic.