The Federal Reserve Bank of New York published a blog that summarizes research into the effects of the closure of 4,821 bank branches since the financial crisis. While it does not explicitly mention prepaid cards, the research elucidates why bank accounts are not necessarily the best option for everyone. The conclusion of the research is that poor people are more likely to live in ‘bank deserts.’
The closing of nearly 5,000 bank branches since 2009 has generated understandable concern that low-income or minority communities are losing access to mainstream financial services. Consistent with that concern, we find that residents of low-income neighborhoods have become somewhat more likely to live in a banking desert since the crisis. By contrast, we find that low-income and majority-minority tracts were actually less exposed to branch closings. Nevertheless, the evidence that motivated us to look at branch closings indicates that such neighborhoods are most harmed by debranching, suggesting that concerns remain.
This loss of branches explains why bank accounts may not always be the best option for everyone. The Fed study focuses primarily on access to credit, and not basic financial services.
Of course, a banking desert is not necessarily the same as “financial services desert” if alternative providers such as check cashing firms, pawn shops, and payday loan stores are available instead. However, these “fringe” providers are considered to be part of the problem by some consumer advocates, and they certainly aren’t known to supply small business loans or mortgages.
Critics of prepaid cards often say that prepaid cards compare unfavorably to bank accounts both in terms of cost and convenience. What this research show sit hat someone who is living in a bank desert may not have access to mainstream financial alternatives. Traditional bank accounts may not be the best option when a prepaid card offers more reload locations and surcharge free ATMs than would be available from a bank or credit union.
Too often there is an assumption that low and moderate income people are making bad choices, but it may be that they are living in place that does not offer banking services, because their neighborhood branches were among the nearly 5,000 closed in the past few years. Regulators and critics would do well to keep the realities of life in lower income neighborhoods in mind before trying to force prepaid cards into a mold that might work in the neighborhoods where they live, but not in ones that have lost their bank branches.
Overview by Ben Jackson, Director, Prepaid Advisory Service at Mercator Advisory Group
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