How is a bank or credit union branch like a supermarket? Both branches and grocery stores nurture a geographic area, each in their own way.
United States government agencies such as the Department of Agriculture and the Centers for Disease Control define “food deserts” as low-income urban neighborhoods that lack supermarkets or other venues providing convenient access to affordable, healthy foods. The agencies specifically study such areas because residents there often lack accessible healthy food options. As a result they become more vulnerable to obesity, heart disease, diabetes and an array of related maladies.
If the lack of nutritious grocery offerings in food deserts can threaten physical health, then it is plausible to presume a lack of convenient banking offerings may threaten families’ financial health. Further, if those conditions prevail more in low-income neighborhoods, the lack of access is likely harming those most in need of financial counsel.
My firm has studied “banking deserts,” low-income urban neighborhoods with limited access to banks or credit unions, and the findings can help as the industry weighs the future role, and existence, of branches.
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Studying Banking Deserts in the Asphalt Jungle
The study examined branch distribution in four major metropolitan areas in different regions: Philadelphia, Atlanta, Minneapolis and Los Angeles. All four rank among the 20-largest metros in the U.S., with all but Minneapolis ranking in the top 10. The study set out to determine whether residents of low-income neighborhoods in those markets found fewer financial services alternatives than residents of more affluent communities.
Our hypothesis going into the research can be summarized as: “All neighborhoods, irrespective of income profile, enjoy similar access to bank and credit union branches.” To investigate that hypothesis, the study examined the presence of convenient branch access in each census block group within the four markets. There were two exceptions. First, the analysis omitted block groups where the trade-area population density was less than 2,000 residents per square mile, to eliminate rural areas on the fringe of metros. Second, the analysis omitted block groups where the trade area showed an employment-to-household ratio of greater than three-to-one. This served to eliminate downtown and similar districts.
An eye on convenience. The study defined convenience in terms of a specific trade-area radius around the center of each block group, with the extent of that radius being an inverse function of the surrounding population density.
In summary, empirical data show branches in areas of greater population density display tighter drawing areas, because consumers define convenience not by distance but by time; and transit times in high-density areas with numerous traffic lights, etc., tend to take longer. The study then tallied the number of branches (bank and credit union) within each block group’s relevant radius, and compared those counts against the median-income level within that same radius.
Lack of Branches Definitely Affects Local Markets
Three of the four markets show strong evidence that less affluent neighborhoods suffer from lesser access to convenient branches.
For example, in Philadelphia, residents of block groups with median income of less than $50,000 find (on average) half as many convenient branches as residents of more affluent block groups. Atlanta and Los Angeles show similar trends, though with slightly less disparities across the tiers. Notably, branch levels in Minneapolis remain similar irrespective of income profile.
Average number of branches in trade area
|Median Household Income
|$35,000 – $50,000
|$50,000 – $75,000
|$75,000 – $100,000
More alarming than the average counts is the proportion of block groups that lack any convenient branches nearby. In each of the markets except for Minneapolis, 30%-40% of the block groups with median income of less than $35,000 lack any convenient nearby financial services provider. (Keep in mind, this says more than that the block group itself lacks a branch. Rather, the count of branches is defined within a trade area around the center of the block group. Thus, in almost all cases, it spans into additional nearby block groups.
In Philadelphia and Atlanta, a similar proportion of block groups in the $35,000-$50,000 income tier lack any convenient branch.
|% of Median Income Households
With No Convenient Branches
|$35,000 – $50,000
|$50,000 – $75,000
|$75,000 – $100,000
|Total block groups
Further, in Philadelphia, Atlanta and Los Angeles, another 15%-25% of block groups in the two lowest-income tiers have convenient access to only a single branch in their primary trade areas. And while one branch option remains superior to none, that still leaves the consumers in those single-branch trade areas lacking any significant leverage in choosing providers. Beyond that, the operator of that single branch, as a sole provider, doesn’t face competitive pressure to accommodate special customer needs or deliver differentiated service.
Here’s a wrinkle regarding credit unions: They remain slightly more prevalent in low-competition markets studied. For example, in Philadelphia, 27% of the branches in single-branch trade areas belong to credit unions, compared to 23% of branches in two-branch trade areas and only 16% in trade areas with three or more total branches. Los Angeles and Minneapolis show a similar trend of greater credit union prevalence in single-branch trade areas. (The Atlanta market presents no discernible similar pattern.)
‘Banking Deserts’ Genuinely Exist, and Matter
In the Philadelphia metro area, 100,000 households live in block groups with no convenient branches within their primary trade areas, and another 70,000 households live in block groups with only one nearby convenient branch. Combined, these banking deserts impound about 10% of the household base of the metro overall, excluding the rural and employment-center block groups described in the methodology summary. In Atlanta, 115,000 households live in banking deserts, as do 285,000 households in Los Angeles. In Minneapolis, only 30,000 households live in banking-desert environments.
Even in an era of online and mobile banking channels, the lack of financial services options in many low-income neighborhoods likely creates adverse impacts in terms of forcing consumers into harmful offerings such as payday lenders, check-cashing services and pawn shops; reducing pricing and service leverage with bank and credit union providers; and limiting opportunities for consumers to gain financial literacy and/or initial introductions to the mainstream banking system.
Further, while electronic channels can provide an alternative to branch-based delivery for some financial transactions, keep in mind that many lower-income households suffer from a lack of online access, too.
And the physical branch remains uniquely positioned to advance financial literacy, foster community engagement and philanthropy, and support the formation and maintenance of local small businesses.
Here’s an interesting detail: Although the data illustrate a stark disparity in banking availability in three of the four markets, the Minneapolis statistics suggest it is possible for institutions to provide consistent branch options across an entire metro area.
This may be a legacy of the three large banks with headquarters ties to the market (Wells Fargo via the former Norwest, US Bank and TCF), it may be a function of the Minneapolis metro’s more compact urban geography, or it may reflect a more affluent overall market, as evidenced by the highest median income among the four markets studied. Still, the sizable count of households in banking deserts in the other three metros dictates a need for banks and credit unions in those markets to reevaluate their Community Reinvestment Act and service-mission efforts (respectively) to ensure they address their entire markets.
In doing so, not only can financial institutions improve the financial health of low-income households today, but they can also help build stronger and more resilient neighborhoods for the future.