Banking Desert: A banking desert refers to an area, like a neighborhood or a part of town, where there are no banks nearby – either within the same area or within 10 miles from its center. Economists from the Federal Reserve Bank of New York have pinpointed 1,214 such banking deserts in the United States. Most of these are situated in places with fewer people. Out of all the banking deserts, 23% are in big city regions known as metropolitan statistical areas (MSAs), while the rest are in rural regions. Interestingly, certain MSAs like New York and Boston don’t have any banking deserts at all. This information is from a report by the Federal Reserve Bank of New York called “The ‘Banking Desert’ Mirage.”
Understanding Banking Desert
Banking deserts are places where there are no banks nearby for people to visit. There are various reasons why a banking desert might exist. For instance, it could happen because:
- Some bank branches that weren’t doing well might have closed down.
- Banks might have failed, leading to no banks in that area.
- The number of people living in the area might have decreased.
- More people might be using online banking, and fewer people might want to go to physical bank branches.
After the financial crisis of 2008 and its aftermath, many banks shut down. In total, between 2008 and 2016, 6,008 out of 95,018 bank branches closed. This led to the creation of 86 new banking deserts in rural areas during that time. Unfortunately, these banking deserts had a bigger impact on minority communities. Around 25% of all the closures happened in areas where most people were from minority backgrounds.
This information comes from a report by the National Community Reinvestment Coalition (NCRC) called “Bank Branch Closures From 2008 to 2016.
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Disadvantages of Banking Deserts
Banking deserts can cause problems for the people living in them due to several reasons. One main issue is distance. Imagine someone needs to put money in their account, take money out, or ask for a loan. They might have to drive for an hour or even longer to get to the nearest bank. Alternatively, they might have to use financial services on the internet, like online loans or digital wallets. However, this online option could require some knowledge about using technology.
Apart from the practical difficulty of finding a physical bank, not having easy access to banking services can make it harder to learn good money habits. Not being familiar with how banks work can lead to less understanding about money matters. This lack of understanding can make it tough to grasp basic financial ideas, like making a budget, saving money, and building a good credit history.
Banking Deserts and the Unbanked
Around 5% of people in the United States, which is about 7.1 million households, don’t have a bank account. Additionally, about 13% of Americans are underbanked, meaning they have a bank account but also use other financial services like payday loans and check-cashing.
Interestingly, when it comes to whether areas without many banks have more unbanked and underbanked people, the answer seems to be no. Studies indicate that having fewer nearby bank branches isn’t the main reason some people don’t use banks.
Instead, people might choose not to have bank accounts because:
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- They think banking is too expensive.
- They feel they can’t open a regular bank account due to past banking problems that led to a negative ChexSystems record.
- They have doubts about the banking system or government oversight.
- They primarily speak a language other than English and find it hard to communicate with banks.
- They are not documented residents and think they can’t open a U.S. bank account.
These are just some of the reasons why people might decide not to use bank accounts, regardless of whether they live in an area with few banks or not.
What Is a Banking Desert?
A banking desert is a census tract area or neighborhood that has no banking branches located in it or within 10 miles of its center. Banking deserts are more commonly found in rural areas than urban areas.
What Causes a Banking Desert?
There are a number of factors that can result in the creation of a banking desert, including the closure of underperforming branches, an increased move toward digital banking rather than branch banking, and population loss. The 2008 financial crisis also resulted in the creation of 86 banking deserts in rural areas as thousands of bank branches across the U.S. were closed.
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Where Are Banking Deserts Located?
The majority of banking deserts are located in rural, desert areas including large parts of the Southwest. For instance, there is a concentration of banking deserts in southeastern California, Arizona, and Nevada.
What Is Unbanked?
Being unbanked means that you don’t have a bank account. Approximately 5% of the U.S. population is unbanked. People who are underbanked 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.
The Bottom Line
Areas without nearby banks can make simple money tasks, like paying bills or putting in checks, harder. However, digital banks could provide an answer. Digital banking tries to help people in places without nearby bank branches. An extra benefit of digital banking is that online banks might have fewer fees and give you more interest on the money you keep in your account. Opening an online bank account is also quite simple, which can help reduce some of the problems of living in an area without many banks.
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