Experts say online banks may help alleviate ‘banking desert’ woes

Inside Subprime: November 15, 2017

By Andrew Tavin

The term “food desert” has been in use for decades. It describes an area, whether urban or rural, without easy access to a supermarket and fresh produce. Residents of food deserts often have nowhere other than fast food and convenience stores to get meals, which makes maintaining a healthy diet very difficult.

Although the term “banking desert” has entered our cultural dialogue more recently, the concept is similar. It describes areas without banks where customers have to turn to more “unhealthy” financial options. These might be payday lenders or check cashing services, both of which can take a heavy toll on your finances. 

A recent study by researchers at the New York Federal Reserve found that instances of banking deserts have expanded massively in the years since the financial crisis, due to the closure of almost 5000 bank branches. The study defines a banking desert as “a census tract — a relatively homogeneous area or neighborhood containing about 4,000 people — with no branches within ten miles of the center of the tract.”

The researchers also cite another study that found a relationship between distance from a bank and higher interest rates on small business loans, just one example of the ways lack of access to nearby banks can cause financial troubles. But business owners are far from the only people affected by banking deserts. Nearly everyone will need a loan at some point in their life, and without access to a bank, they could be forced to turn to less trustworthy means.

The Fed study also looked to a previous U. C. Berkeley study to determine to what extent the current banking desert environment is the result of of recent bank branch closures. Curiously, a large percentage of bank closures since 2009 have been in high-income areas, yet lower-income individuals are more likely to live in a banking desert. The Fed researchers suggested this is because bank branches that close in higher-income areas are more likely to be replaced quickly, while branches that closes in a low-income area may not be.

However, it’s important to note the U. C. Berkeley study also found that even when those closed branches were replaced, small business lending in the area still didn’t return to levels it was at before the closure. This is due to the loss of “soft information,” or the personal knowledge a bank has about its clients. When a bank branch closes, the relationship it built with its borrowers disappears, and the former customers may be less willing to deal with a new bank, and thus less likely to get the kind of rates and tailored attention they need.

The Fed researchers also found that low-income rural areas are more likely to lack access to banks than low-income urban areas.

So what can you do if you live in a banking desert? Thankfully, there are some options.

John Savin, owner of Savin Wealth Management, reiterated the concerns of living in a rural banking desert before explaining how consumers can cope with the challenge:

“Rural, low income communities tend to bear the brunt with little to no options for local banking. Individuals and small businesses in these areas tend to rely on personal relationships within their community to thrive. Without a bank branch to visit and sit with a representative, obtaining basic financial services like a mortgage, bank account, or a loan can be challenging. The options that typically are available tend to be high cost alternatives not favorable to the customer.”

That’s why Savin suggests going online: “My advice would be to embrace technology. Fintech has been on the rise – many companies and banking institutions offer online mobility services. Credit unions are a great option to review too, as they usually charge lower to no fees and have an abundance of personal finance assistance. An individual can deposit checks, open an investment or bank accounts, obtain insurance coverages, apply for a loan or mortgage, and find other financial wellness tools. Initially it can be frustrating and uncomfortable familiarizing yourself with mobile banking, but with a little effort and patience the convenience will be appreciated. Spending time on a line will not be missed when you can click a button on your cell phone to do your basic banking.”

Chad Parks, CEO of Ubiquity Retirement + Savings also recommended going the technical route.

“When it comes to banking deserts, assuming the person has access to a computer, local library, or a smart phone, I’d recommend looking at online services and apps that allow you to open a debit card and create a savings plan,” he said. “Perfect example: Qapital. Because the bulk of businesses in bank deserts are small, it’s critical for people to use services like Qapital (or Simple) to take advantage of convenient bank services while generating a sustainable savings plan.”

If you live in a banking desert and want to check out some online banks, check out the OppLoans financial app database! Featuring apps like Qapital and more, we’re here to help and fill in the gaps in your money needs. 

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