Using banks can lead to benefits such as increased savings, financial literacy, and access to credit. But some groups are less likely to use banks than others. Compared to the national average, low-income households are four times more likely to be “unbanked”; Black households are two-and-a-half times more likely to fall into this category.
“Why do we see these continued disparities, despite all these benefits?” says Alexander Zentefis, an assistant professor of finance at Yale SOM.
Policymakers and researchers have speculated about two possible explanations. One is access: these households might not have high-quality bank branches nearby. The other is demand: perhaps these groups are less inclined or able to use banks because, for instance, they have less capacity to save or don’t trust the institutions.
In a new study, Zentefis and Jung Sakong of the Federal Reserve Bank of Chicago attempted to quantify those factors. Using mobile device data on users’ visits to bank branches, they found distinct patterns. For low-income households, the primary reason for less frequent bank use appeared to be lower demand. Plenty of banks were located nearby, but these households weren’t using them as much.
But for Black households, the barrier was access: branches tended to be farther away from their homes. And in some areas, Black households’ demand for banks was even higher than among White households. This finding counters previous speculation that Black households’ lower bank use might be driven by lower demand.
The results point, if anything, “in the opposite direction,” Sakong says.
With the rise of mobile and online banking, one might assume that visits to branches aren’t an important indicator of bank use. But when Zentefis and Sakong looked at data from the FDIC’s Survey on Household Use of Banking and Financial Services, the participants’ answers suggested that people still considerably rely on in-person interactions at bank branches.
This was particularly true for low-income and Black households which didn’t appear to be compensating for lower in-person use with more digital use. For instance, Black respondents were 10% less likely than White respondents of similar ages and income levels to have visited a branch in the last year. But they were also 7% less likely to say they relied primarily on mobile or online methods to access bank services.
“They rely on branches more,” Zentefis says. “And yet they’re visiting branches less.”
To investigate the reasons, the researchers examined anonymized data from the company SafeGraph on mobile phone users’ movements, covering about 10% of all U.S. smartphones, from January 2018 to December 2019. The data showed how many people from each Census block group—a geographical area including between 600 and 3,000 people—visited each bank branch in the country per month, with slight distortions and noise added to protect user privacy.
The team considered three factors. The first was demand, which encapsulated any characteristics of people in a Census block group that affected whether they visited a bank. These traits could include their savings need, financial literacy, trust in banks, and flexibility in schedule.
The second factor was the effect of distance on branch visits—that is, the extent to which having a branch farther away discouraged people from traveling to it. And the third factor was branch quality, which covered any features that made a bank more attractive. These included having more products or services, better interest rates, more ATMs, more amenities such as a café, or being located in a desirable neighborhood.
Bank access was determined by both branch quality and the effect of distance. People in a Census block group would be considered to have high bank access if they had many branches nearby, or if the branches around them were high quality.
Because the data had been slightly distorted for privacy protection, the team had to figure out the values of these factors in a roundabout way. They ran computer simulations of user visits to branches and performed the same types of data tweaks that SafeGraph did. By trying different parameter values until their simulated data closely matched the observed data, they could determine which values were most likely to be accurate.
The researchers found substantial variation in bank access between regions. For example, people in eastern New England had much better access than those in the Deep South. Urban centers had more access than neighboring rural areas. And within a metropolitan area, some neighborhoods fared substantially better than others.
“There’s a lot of local variation in access, above and beyond the city level or county level,” Sakong says.
The team then focused on demographic factors that were linked to lower bank usage. To determine the role of income, they analyzed how branch quality, distance, demand, and visitor numbers changed as the median household income of a block group increased. And to determine the role of race, they extrapolated how those factors changed if they compared a hypothetical 100% Black block group with a 100% White block group.
Surprisingly, low-income households had higher bank access than richer ones. They tended to be closer to branches, perhaps partly because they often lived near commercial areas, and the quality of those branches was similar to the quality of branches in richer communities.
Instead, low-income households appeared to have lower demand. They might lack the minimum balance to start an account or want to avoid bank fees, or they might not need certain in-person bank services such as safe deposit boxes. Their lower demand outweighed their higher access, ultimately leading to fewer bank visits.
Among Black households, a different pattern emerged. Compared to White households, “access was much worse,” Sakong says.
A Census block group composed of all Black residents would have 5.6% fewer branch visitors per month than an all-White group of similar ages and incomes, the team estimated. This discrepancy was entirely driven by lack of access. There was no evidence of lower demand; in fact, in big cities, Black households had a slightly higher demand for banks than White households did. But this higher demand was more than offset by weaker bank access, leading Black communities in big cities to use branches less.
How could policymakers close these gaps in branch use? One proposal is to add banking services to post offices. This plan would increase access for all but potentially could widen the racial disparity because post offices tend to be located closer to White households, the researchers found. However, it’s possible that adding banking services to post offices could increase demand among low-income households, the researchers argue. If one reason for the lower demand in these households is their lack of trust in banks, and they trust post offices more, they might be more inclined to use those services. Another policy option would be to subsidize or give tax breaks to banks that set up branches in Black communities, to help shrink the racial gap in bank access.
In the future, researchers could use similar mobile phone data and analysis methods to investigate other disparities. For example, they could disentangle whether gaps in the use of healthcare are due to differences in distance, quality of services, demand, or some combination.
“This paper reveals a way to use that data and better understand, ‘What are the driving forces?’” Zentefis says.