Tuesday, October 17, 2023

Banking deserts and the reliance on costly capital in rural America

 As online banking has steadily increased, many banks have decided to permanently close a number of their branches. Given that banks are choosing to close their less profitable branches, it is unsurprising that rural communities are amongst the hardest hit by the closures. (The tendency for rural banks to make less profit is partly due to the government crackdown on costly overdraft fees.)

The lack of banking access more keenly affects rural residents than those in urban and suburban areas. First, rural residents are more likely to visit a physical bank. According to the Federal Deposit Insurance Corporation, more than 40% of rural customers visited a bank at least ten times in 2019. Banks are also more likely to close their branches in rural areas, forcing residents to travel further, often to the next town, to access a bank. Lastly, rural residents may not have access to spectrum or broadband which then limits their access or use of internet banking. 

Banks serve not only as financial institutions in rural communities but as social ones as well. Darrin Williams, CEO of Southern Bancorp, told NPR, "In a lot of the rural communities we serve, the bank branch is a part of the social fabric. If you go to Truman, Arkansas, on a payday Friday, there are going to be 10 people deep in line. People want to come to that bank branch because it's social."

With the exodus of in-person banking services, rural communities have essentially become located in banking deserts which are defined as census tracks in which there are no bank branches located within a 10-mile radius of the tracts' centers. In a study conducted by the Federal Reserve, 1,500 of 2,100 existing and potential banking deserts are located in rural areas, and the counties most affected are those with a greater proportion of African-American residents

Living in a banking desert perpetuates the number of unbanked rural residents. People who are unbanked, meaning that they do not have a checking or savings account at a bank or credit union, reported the lack of branch access as one of the major hurdles to them becoming banked

Communities in banking deserts also become vulnerable to predatory lenders. When rural consumers do not have access to traditional sources of credit during times of financial distress, they may turn to pawnshops and payday lenders. Loans from such places tend to have much higher interest rates and it can be a gateway to a cycle of debt. 

In fact, rural residents are more likely to not have any credit established at all. Rural areas have the highest rates of people without a credit history from the top three consumer reporting agencies: Equifax, Experian, and Transunion. This is due to the inaccessibility of banks, the inability to meet the minimum balance requirements, and the mistrust in banks. The lack of usable credit history makes it more difficult to receive an extension of credit during financial hardship and this increases dependency on costly nontraditional sources of credit. 

Another factor affecting access to traditional credit is unpaid medical bills. Almost one in five households in the U.S. have past-due medical bills and these numbers are greater in rural areas. (Read more about the rural healthcare crisis here.) This has a negative impact on credit reports and ultimately limits access to credit, housing, and employment. Unpaid medical bills also fuel costly borrowing. 

Rural areas have the highest utilization of non-bank credit. These loans can have devastating consequences such as the risk of eviction or foreclosure. The reality is that payday loans are not quickly paid off and tend to result in several additional loans within a short timeframe. The typical payday loan borrower takes out eight loans in a year and is in debt for more than six months. Interest rates are also astronomically high. In the end, borrowers pay an average of $520 in interest on a $375 loan. 

The rising financial crisis in rural communities led to the development of the Rural Initiative under the Consumer Financial Protection Bureau (CFPB) in 2022. The goals of the Rural Initiative are to conduct research to increase access to credit, develop effective ways for residents to file complaints with the CFPB, conduct roundtables with rural stakeholders, and work with federal agencies to ensure adequate financial resources. 

The Rural Initiative is a step in the right direction, but it is clear there needs to be a drastic shift in how financial institutions operate in rural communities and the resources available there. Steven Jackson, a parish commissioner in Shreveport, Louisiana, told NPR, "When you have young boys and girls riding by and seeing empty buildings, or that building which was once a bank is turned over to a payday lender, what message are we sending? Is my neighborhood not a priority?" 

Read more about rural banking here and here


Caitlin Durcan said...

Thank you for this piece, Isha! I never considered how bank closures would impact smaller (population-wise) communities. However, I have thought about this issue as it relates to older people. Online banking is a relatively new thing and I know a lot of people are hesitant to use it thinking it is not as secure as going to a bank teller in person. Additionally, some tasks require going to a physical bank location (certain checks must be cashed in person, etc.). Thank you for bringing this issue to my attention!

Chris Datu said...

Thank you for this informative post, Isha. I was not aware that banks and their disappearance was affecting rural communities this critically. I thought it was down-to-earth the way pay-day at the bank is seen as a social event. However, it’s astonishing to see yet another way critical service providers are absent in these communities, which in turn makes these services exponentially more costly for already impoverished areas. This seems like yet another mechanism in place that perpetuates the cycles of poverty plaguing many rural communities. I’m glad you included the discussion about the Rural Initiative under the CFPB to show there is at least some recognition of the serious issue at hand. I only hope their research efforts turn into tangible reforms soon.

Natalie M. said...

Great article, Isha! I considered how banks consolidate and are leaving certain rural areas. While these days I rarely go in person to my bank (there’s one Wells Fargo location in Davis) and mainly rely on online banking, I never knew how banking could be a “social” and necessary piece of smaller towns. One thing I was also thinking about is how banks are great employers. Bank tellers make good money and usually only require an undergraduate degree in finance or economics. While today it seems most jobs require some form of post-undergraduate education, working at a bank is one of the few jobs left where a masters is not needed. When banks close in small town, it lessens the economic opportunities for both people who want to draw money from banks, and from people who want to work there too. While the switch away from cash towards credit cards has been advantageous, it also takes away the need for physical banks in small towns.