You may be familiar with the concept of food deserts in the United States, which highlight stark contrasts of food insecurity for too many Americans. I’d argue that another systemic issue of equal consequence is the increasing number of banking deserts, which oftentimes go unnoticed even in highly developed communities. This is disastrous because reliable access to financial institutions is paramount to the prosperity of communities, from empowering individuals to accumulate wealth to accessing capital to fuel entrepreneurialism.
If you talk with any financial advisor about how to build wealth over time, they will likely provide you with a short lesson on compound interest, the principle that money will continue to grow over time by earning interest. In many hypothetical models, 6 percent interest year-over-year is considered a conservative benchmark for growing wealth and is used widely in investments portfolios from 401(k)s to mutual funds as a de facto standard. However, for far too many people, this whole concept of wealth building and “money earning money just by being money” is an unattainable fantasy.
In reality, millions of Americans live in “underbanked” or “underserved” areas, which impact urban and rural communities alike. Recent Congressional hearings have emphasized the extent to which many of these communities have struggled for equitable access to cost effective financial vehicles, because of systemic issues of redlining and other racially motivated exclusionary tactics. As a result, banking deserts are oftentimes comprised of predominately BIPOC (Black, Indigenous, People of Color) residents. Because of this disproportionate inaccessibility to financial services providers, underbanked Americans find that their salaries are essentially earning negative interest or growth over time. This reverse compounding interest is the result of not only a high opportunity cost associated with accessing cash, but also a decrease in purchasing power over time due to inflation.
At the heart of both of these issues is a lack of equitable access to financial institutions.
The Dangers of Banking Deserts
Financial institutions rely on GIS and the location intelligence it provides to meet the needs of an increasingly digital customer base. Many accountholders may never need to go to a physical location because they utilize mobile apps, credit cards, and direct deposit from their employers that provide instant access to their funds. While this segment is important to a bank, it’s crucial to recognize that they are a privileged group.
Those three criteria, internet access, creditworthiness, and employer partnership are not universal, and for millions of Americans they are insurmountable hurdles. Spatial analysis reveals glaring inequities in internet and access to physical bank locations in areas with higher concentrations of BIPOC residents.
Many communities are disconnected from banks because of limitations in public transportation, walkability, or remoteness. For those living in urban areas where personal vehicle ownership is oftentimes not financially feasible, options are scarce and take considerably more time and resources to use – if available. Without equitable access to banks and financial services, many communities rely on check cashing services that charge steeper fees which can range from 2 to 8 percent.
This is unfair and causes real harm to people. Take for example, the recent COVID-19 stimulus payments that were made directly to US households. CNBC reports that the cost of accessing those funds within underbanked communities resulted in nearly $66 million dollars being taken away from families in need.
Six percent is a lot to lose from each check. Furthermore, that’s simply to cash the check, and cash earns no interest over time. Physical currency lacks security and loses value year-over-year.
This loss of cash and lowering purchasing power leads to a cycle of reverse compounding interest. Tragically, this spiraling trap affects the most at-risk or marginalized communities. This is why achieving equitable practices in financial services is so vital to the continued health and wellbeing of our society. By addressing these issues, financial institutions can bring opportunity to enact meaningful change for impacted communities across the county.
Investing to Make an Impact
Utilizing location intelligence, financial institutions can tackle difficult problems like eliminating structural barriers to equity. GIS helps institutions analyze community level needs, map inequities, increase access where it is needed, and measure performance.
Location intelligence empowers banks and financial services providers to analyze their existing coverages to identify potential barriers based on walkability or distance to public transportation of branches and ATMs. This can help uncover potential communities that need additional investments and reverse the cycle of negative compound interest.
Additionally, spatial analytics enable businesses to integrate disparate data sources to gain an understanding of how their operations are impacting customers – beyond traditional compliance measures. Spatially enabled demographics allow providers to examine census data to reveal racial and socioeconomic details at a hyperlocal level. This analysis can uncover inequities and help reinforce programs tailored towards equitable finance by guiding where and how local community segments can benefit from additional investments.
Increasing equitable access to financial institutions is absolutely essential to creating a more just world. It’s a necessary first step to start eliminating longstanding structural barriers within BIPOC communities. When a bank enters a community, it fosters financial literacy, but that’s just the start. The financial services sector can learn a lot by applying the location lens to understand, support, and empower existing and future generations of marginalized people in America.
Ready to enact meaningful change within our communities? Discover how Esri is supporting financial services providers with tools and methodologies to eliminate structural barriers to racial equity.