Samira Salem

Location counts for financial inclusion

Credit unions place a higher percentage of branches in low- and moderate-income areas than banks.

July 17, 2019

In the wake of the financial crisis, banks went on a closing spree: Between 2008 and 2016, banks closed 6,000 branches (6% of all bank branches), creating 86 new banking deserts.

During the same time, credit unions closed just 300 branches (roughly 1% of branches).

Fast forward a few years, and we find that the while banks closed 8,200 branches between 2013 and 2018 (9% of total bank branches), the number of credit union branches grew by nearly 400 during that time (a 2% increase).

The number of credit union branches has increased each of the past five years, while the number of bank branches has fallen each of the past nine years.

In an era where most consumers use online and mobile banking, some may question the importance of branches. Yet, evidence points to the continued importance of physical access to these facilities.

The Federal Reserve’s Survey of Consumer Finance, for example, finds that branch location is one of the top reasons cited for choosing checking account providers.

Additionally, the Federal Deposit Insurance Corp.’s (FDIC) 2017 “National Survey of Unbanked and Underbanked Households” finds the great majority of banked households visited a bank branch during the past year. More than one-third visited 10 or more times, and even households that primarily use online banking still visit branches.

The FDIC survey also found that one of six unbanked individuals visited a bank branch in the past 12 months.

Research shows branch location can be an important factor influencing access to affordable credit for small businesses and individuals, especially low-income borrowers.

In both cases, geographic proximity matters because it facilitates access to “soft” information gathered through frequent and personal interactions with borrowers that influences lenders’ decisions.

In the case of low-income borrowers where access to credit can be severely limited by inadequate credit scores, a 2010 paper published in the Journal of Money, Credit and Banking finds “mortgage originations increase and interest-rate spreads decline when there is a bank branch located in a low- to moderate-income neighborhood.”

The results are similar for small business lending: As small businesses drift further away from bank branches, loan originations decline and interest rates increase.

This research underscores the importance of location when it comes to providing financial services and products that respond to members’ needs. Branch locations matter to members, especially to those who aren’t wealthy.

NEXT: Advancing financial inclusion

Advancing financial inclusion

Recent research by CUNA in collaboration with the University of Wisconsin’s Applied Population Lab examines geographic access to financial institutions for low-income, modest-means, and high-income groups in both rural and urban areas by considering the location of community-chartered credit union branches and bank branches.

Our research reveals that community-chartered credit unions locate a higher percentage of branches in moderate- and middle-income (71% vs. 66%) and low-income (6% vs. 5%) census tracts compared with banks.

By contrast, banks place a higher percentage of branches in upper-income areas compared with credit unions (29% vs. 23%). These results hold across all credit unions, even those with restricted fields of membership.

These findings generally hold for both rural and urban areas. As we know, commercial banks are owned by shareholders and are structured to maximize profits and shareholder value.

This can lead to banks closing “unprofitable” branches in low-income, rural, and diverse areas—even if that means that local residents are worse off.

‘Credit unions are doing their part to reduce obstacles to financial inclusion.’

On the other hand, nonprofit, cooperative credit unions are structured to serve their members first. Therefore, we would expect them to locate more branches in areas that may not be as profitable but provide important access to their members.

This is exactly what we see in the data. Banks locate a significantly smaller percentage of branches in low-income rural areas (5%) compared with credit unions (8%).

Compared with banks, credit unions place a higher percentage of their urban branches in low-income areas (6% vs. 5%) and modest-means areas (69% vs. 63%).

In contrast, in both rural and urban areas, banks locate a higher percentage of their branches in upper-income areas. Nearly one-third of bank branches in urban areas are in upper-income census tracts (32%), compared with just one-quarter of credit union branches (25%).

In rural areas, banks locate 4% of their branches in upper-income areas compared with 2% of credit union branches.

Branch location clearly matters when it comes to financial inclusion. Research shows credit unions are doing their part to reduce obstacles to financial inclusion, especially for those of modest means.

In fact, credit unions are doing a better job than banks at using their limited resources to facilitate access for low- and moderate-income members even when they have restricted fields of membership.

SAMIRA SALEM, Ph.D., is a senior policy analyst for Credit Union National Association.