What Is a Banking Desert?

A banking desert is a census tract or neighborhood which has no bank branches in it or within 10 miles of its center. Economists at the Federal Reserve Bank of New York identified 1,214 banking deserts in the U.S., the majority of which are located in sparsely populated areas. Twenty-three percent of all banking deserts are located in metropolitan statistical areas (MSAs) while the remainder are found in rural areas. Some MSAs, such as New York and Boston, have no banking deserts at all.

Key Takeaways

A banking desert is defined by the U.S. census as a tract of land with no bank branches in the tract or within 10 miles of its center.
The majority of banking deserts in the U.S. are located in rural areas, with less than 25% located in Metropolitan Statistical Areas (MSAs).
Banking deserts are not necessarily linked to the proportion of unbanked and underbanked people in that area,
The people who live in banking deserts either do not have a bank account or do have a bank account but must rely on alternative financial services, like check-cashing operations.
A number of factors can cause banking deserts, including the closure of branches that are determined to be underperforming and increased access to digital banking services.

Understanding Banking Desert

Banking deserts are areas where access to branch banking is nonexistent. There are different reasons why a banking desert may exist. For example, the creation of a banking desert can be the result of:

Closure of branches that have been identified as underperformers
Bank failures
Population losses
Increased demand for digital banking services paired with decreased demand for branch banking

The 2008 financial crisis and its aftermath saw many banks close. In total, 6,008 of 95,018 branches were lost between 2008 and 2016, resulting in the creation of 86 new banking deserts in rural areas during that time. These banking deserts disproportionately affected minorities, with 25% of all closures occurring in majority-minority census tracts.

Note

Proportionately speaking, urban areas saw a higher percentage of branch closures as a result of the financial crisis but were less likely to develop banking deserts.

Disadvantages of Banking Deserts

Banking deserts can be problematic for the people who live in them for several reasons. The first issue is proximity. If someone needs to deposit or withdraw or wants to apply for a loan, for example, they may need to drive an hour or more to reach their nearest bank branch or they have to use financial products available online such as online-based lending or E-wallets. This last option might need some digital literacy.

Aside from the logistical aspect of seeking a physical branch, a lack of banking access can make it more difficult to develop good financial habits. Lack of exposure to the banking system can result in lower rates of financial literacy. That, in turn, can make it more difficult to understand basic financial concepts, such as budgeting, saving, and building credit.

Important

Opening an online bank account can help with building a solid foundation of financial knowledge, including learning how to track expenses and manage spending for budgeting as well as the value and importance of saving regularly.

Banking Deserts and the Unbanked

An estimated 5% of the U.S. population, or 7.1 million households, is unbanked, meaning they don’t have a bank account. Another 13% of people in the U.S. are underbanked, which means they have a bank account but also use alternative financial services, such as payday loans and check-cashing services.

In terms of whether banking deserts result in a higher percentage of unbanked and underbanked people in that area, the answer appears to be no. Research suggests that physical proximity to bank branches is not what drives some people to remain unbanked.

Instead, people may opt to go without bank accounts because they:

Perceive banking as being too expensive
Believe they’re unable to open a traditional bank account because of a past banking mistake that resulted in a negative ChexSystems report
Are distrustful of the banking system or government oversight of the system
Speak a primary language other than English and find it difficult to overcome language barriers when accessing banking
Are undocumented and do not believe they can open a bank account in the U.S.

Those are just some of the reasons why people may choose to avoid bank accounts, regardless of whether they live in a banking desert or not.

Tip

Many banks and credit unions offer second-chance checking accounts to people who may have been denied a traditional bank account elsewhere.

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.

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

Banking deserts can make it more difficult to carry out basic financial tasks, such as paying bills or depositing checks, but digital banks may be a solution. Digital banking aims to help fill that gap for people who may live in areas where there are no bank branches nearby. Another advantage of digital banking is that online banks may be more fee-friendly while offering higher interest rates on deposit accounts. Online bank accounts are also relatively easy to open, which can help to ease some of the impacts of living in a banking desert.

Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Federal Reserve Bank of New York. "The 'Banking Desert' Mirage."
BPI.com. "Do Bank Mergers Create "Banking Deserts"? The Evidence Indicates No."
NCRC. "Bank Branch Closures From 2008 to 2016: Unequal Impact in America's Heartland." Pg. 3.
Board of Governors of the Federal Reserve System. "Report on the Economic Well-Being of U.S. Households in 2020 – May 2021."

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