Without access to basic financial services, poor and minority communities are more likely to use dangerous and expensive options.
A neighborhood saturated with fast food restaurants and bodegas but without a grocery store would make it difficult to respect a healthy diet. It would be just as difficult to manage finances and build wealth without a bank branch nearby. Unfortunately, that’s exactly what a growing percentage of American households are being asked to do: manage their finances and build wealth without having access to a traditional bank branch nearby.
New York Fed economists recently investigation increasing “banking deserts”, or communities with little or no access to traditional banking services, in their Economy of the Liberty Street Blog. They merged the locations of FDIC-insured bank branches with US Census Bureau data on household income and race to determine whether low-income communities and communities of color disproportionately bore the burden of the closures. bank branches after the recession. To be completely clear: the most important takeaway from the New York Fed investigation is that low-income communities and communities of color have historically and disproportionately limited access to traditional banking services. These trends have implications for the opportunities for households and communities to leverage financial products and services to their advantage.
That doesn’t mean, however, that the evidence couldn’t be used to draw mixed conclusions. The New York Fed reports that low-income communities and communities of color have been less affected than high-income, predominantly white communities by bank branch closures in the shadow of the Great Recession. However, these communities had less to lose initially. Low-income communities and communities of color have experienced bank branch closures for almost two decades—devolve in “banking deserts” for a while.
Federal deregulation in the 1990s enabled banks to shift from primarily serving local communities to serving larger and more profitable geographic areas. Banks withdrew from local communities, closing their less profitable branches that were often in low-income communities and communities of color. High cost alternative financial services began to occupy communities once served by traditional banking services, growing at a rate of 15 percent per year since the 1990s.
When alternative financial services like payday lenders and check cashing stores – the equivalent of fast food chains and convenience stores in this scenario – infiltrate neighborhoods left behind by traditional banks, residents pay a high price to meet their financial needs: the average borrower spends more $ 500 per year in interest just on payday loans. Residents end up diverting money that could have been used otherwise to pay for irregular expenses or to build wealth, instead of paying to use the basic financial products they desperately need to manage their financial lives. Because like convenience stores in food deserts that don’t sell nutritious foods that promote physical health, alternative financial services don’t sell products that boost long-term financial health.
Technology like mobile banking and fintech innovations help reduce the geographic distance between households and traditional bank branches, thereby increasing access to basic financial products. Yet technology alone cannot repair the negative impact that bank branch closures have had on mortgages and small business lending. Simply put, traditional bank branches are still important for accessing credit to build wealth. Without a bank branch in their community, households have limited access to safer and more affordable products, such as a savings account that could be used to pay for irregular expenses or to invest in the future. And, as the New York Fed study shows, residents lose access to small business loans and mortgages when bank branches close, hampering the investment and entrepreneurship needed to stimulate local economic growth.
The consequences of these trends are what makes the type of research undertaken by the New York Fed so important. It’s a time when households live unprecedented inequalities and limited economic mobility, and these experiences are probably exacerbated in part by variations in communities‘resources and opportunities. In other words, some communities are deserts while others are oases – and these banking habitats are divided based on income and race.
Mapping and comparing the locations of traditional banking and alternative financial services can help shed light on the quality of services to which communities have access, and perhaps the extent to which communities are being left behind. Over time, experts can better understand the impact that the changing landscapes of financial services have on communities, and which communities need more investment and innovation. They can also better understand the regulatory reforms needed. With these understandings, investments can be made in existing innovations such as Federal mutual aid credit unionthe micro-agencies division of, CT Prospera, and the Community development financial institutions (CDFI) that provide safe, affordable and wealth-generating financial products and services to low-income communities and communities of color across the country. It would also open the door to imagine and invest in new innovations.
Just as convenient access to grocery stores that sell affordable and nutritious foods helps us maintain healthy diets, convenient access to safe and affordable financial products and services helps us establish and maintain good financial health. . When this is not the case for low-income communities and communities of color, economic growth suffers and households struggle financially. Research should continue to locate communities across the country that are more affected than others, helping to establish evidence for where and how investments and innovations can be made to reverse these trends. In this way, the United States can invest in the communities and households whose financial health will benefit the most.
This message appears courtesy of New America.