Banks, alternative institutions and the spatial–temporal ecology of racial inequality in US cities

Abstract

Research has made clear that neighbourhood conditions affect racial inequality. We examine how living in minority neighbourhoods affects ease of access to conventional banks versus alternative financial institutions (AFIs) such as check cashers and payday lenders, which some have called predatory. Based on more than 6 million queries, we compute the difference in the time required to walk, drive or take public transport to the nearest bank versus AFI from the middle of every block in each of 19 of the largest cities in the United States. The results suggest that race is strikingly more important than class: even after numerous conditions are accounted for, the AFI is more often closer than the bank in low-poverty racial/ethnic minority neighbourhoods than in high-poverty white ones. Results are driven not by the absence of banks but by the prevalence of AFIs in minority areas. Gaps appear too large to reflect simple differences in preferences.

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https://doi.org/10.1038/s41562-021-01153-1
1Department of Sociology, Harvard University, Cambridge, MA, USA. 2Department of Civil and Environmental Engineering, Northeastern University,
Boston, MA, USA. ✉e-mail: mariosmall@fas.harvard.edu
Recent research on racial inequality in the United States has
made clear that the ecology of the city matters, specifically
that the spatial distribution of people and resources across
neighbourhoods contributes to unequal life outcomes1,2. Studies
based on millions of tax records and on field experiments have
made clear that racial differences in both upward mobility and
well-being reflect differences in the neighbourhoods where differ-
ent people live3–5. What makes disadvantaged neighbourhoods dif-
ficult places to live?
The answer to this question is likely to be complex, given docu-
mented differences across high-poverty and racial/ethnic minority
neighbourhoods both in their everyday conditions and in how they
shape those living in them6,7. However, one important way that liv-
ing in a high-poverty, minority neighbourhood may make life dif-
ficult is by undermining access to resources such as high-quality
grocery stores, highly resourced schools or conventional banks8,9.
The scarcity of such establishments in many disadvantaged neigh-
bourhoods has led commentators to refer to such neighbourhoods
as “food deserts”, “school deserts”, or “banking deserts”10–12. In what
follows, we study ‘banking deserts’ and ask whether such establish-
ments are in fact more difficult to access in high-poverty or minor-
ity neighbourhoods.
Access to conventional banking is essential to understanding
economic inequality. Banks provide indispensable financial services
necessary for both upward mobility (educational loans, business
start-up funds, etc.) and general financial well-being (mortgages
and refinancing services, check cashing, international transactions,
emergency loans, etc.). Researchers have documented major dif-
ferences across racial/ethnic and socio-economic groups in the use
of conventional banking and even having a basic checking account
[current account]13,14.
In banking, space matters. To be sure, banking services have
increasingly become available electronically, and the number of
brick-and-mortar branches has naturally declined. Nevertheless,
physical establishments have remained so critical that between 2009
and 2019 more than 17,000 new offices have opened15. There are sev-
eral reasons why. One is customer preferences. In spite of dramatic
technological advances between 1989 and 2013, over that period the
proportion of Americans who reported location as the most impor-
tant reason for choosing the financial institution for their checking
account remained largely unchanged. It stands at about 44%, and
is by far the most cited reason13,16. These expressed preferences are
consistent with what happens in practice. A 2016 Federal Deposit
Insurance Corporation report found that 86% of households used
a teller [cashier] at least once in the previous year13,17. In fact, “visit-
ing a teller remains the most common way for households to access
their accounts” (p. 43)18. Even among those households that pre-
ferred online banking, a majority reported visiting a teller in the
previous year17,19. Another reason is that many needs, such as resolv-
ing disputes or opening or closing accounts, must be done in per-
son, which continues to drive demand for physical banks. A final
reason is that, from the bank’s perspective, brick-and-mortar estab-
lishments provide an entry point to customers to whom mortgage,
refinancing, credit card, investment and other services can be sold.
It is easier for a teller to succeed in selling refinancing or investment
services to a client after an in-person transaction than for an auto-
mated teller machine (ATM) [cash machine] to do so after a client
has mechanically withdrawn their cash.
In addition, from the perspective of the individual, physical
proximity to a bank affects banking practices. A 2017 study based
on nationally representative data found that “households with rea-
sonable geographic access to bank branches are more likely to have
a bank account” (p. 91)13. Lacking a bank in one’s neighbourhood
reduced the probability of having an account, the entry point to
many conventional services. The effects were largest among house-
holds “more likely to be on the margin of bank account ownership”,
the particular populations most likely to be affected by disadvantage
(p. 91)13.
Although neighbourhoods with few or no banks are referred
to as ‘banking deserts’, this term can be misleading in two ways.
First, although a ‘desert’ is a barren landscape, many disadvantaged
neighbourhoods are not deprived of brick-and-mortar establish-
ments8. Instead, as ethnographic researchers have reported, what
many have are alternative financial institutions (AFIs), such as
check-cashing stores and payday lenders20–22. While AFIs provide
important financial services to consumers such as cashing checks,
Banks, alternative institutions and the spatial–
temporal ecology of racial inequality in US cities
Mario L. Small 1 ✉ , Armin Akhavan 2, Mo Torres 1 and Qi Wang 2
Research has made clear that neighbourhood conditions affect racial inequality. We examine how living in minority neighbour-
hoods affects ease of access to conventional banks versus alternative financial institutions (AFIs) such as check cashers and
payday lenders, which some have called predatory. Based on more than 6 million queries, we compute the difference in the time
required to walk, drive or take public transport to the nearest bank versus AFI from the middle of every block in each of 19 of the
largest cities in the United States. The results suggest that race is strikingly more important than class: even after numerous
conditions are accounted for, the AFI is more often closer than the bank in low-poverty racial/ethnic minority neighbourhoods
than in high-poverty white ones. Results are driven not by the absence of banks but by the prevalence of AFIs in minority areas.
Gaps appear too large to reflect simple differences in preferences.
NATURE HUMAN BEHAVIOUR | VOL 5 | DECEMBER 2021 | 1622–1628 | www.nature.com/nathumbehav
1622
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