With thousands of banks, community banks and credit unions, the U.S. is a unique banking market. From time to time, an industry expert of some sort will suggest that the number of financial institutions creates an inefficient market for providing banking services and constrains the development and deployment of new technology. An example cited includes the development of real-time payments which will be orders of magnitude more difficult to roll out in a disparate market like the U.S. as getting 11,000+ institutions to agree on an interoperable approach that reaches most consumers and businesses will take a very long time.
Now it appears the pendulum is beginning to swing the other direction. There are now voices saying that branch and ATM consolidation, whether due to a decline in use or a result of a financial institution acquisition, should stop. One such important voice, Federal Reserve Chairman Jerome Powell suggest that consolidation will unfairly impact the financially underserved:
Decades of bank industry consolidation have weighed on the economies of rural areas as branches and local community banks disappeared and access to financial services declined, Federal Reserve Chairman Jerome Powell said on Tuesday, citing meetings of Fed staff held last year in communities where banks had closed.
The trend is likely stunting business and consumer lending, particularly for already poor and isolated communities, Powell said at a conference at Mississippi Valley State University addressing ways to improve financial services and reduce poverty levels in rural areas.
“The loss of the branch often meant more than the loss of access to financial services; it also meant the loss of financial advice, local civic leadership, and an institution that brought needed customers to nearby businesses,” Powell said. The largest impacts, he said, are on “small businesses, older people, and people with limited access to transportation.”
That comes at a time, he said, when the economy as a whole is doing well, but the benefits are not well spread.
“Data at the national level show a strong economy. Unemployment is near a half-century low, and economic output is growing at a solid pace,” Powell said. “But we know that prosperity has not been felt as much in some areas, including many rural places,” like the counties of the Mississippi Delta.
The concern may mean more pressure to retain branch locations, or perhaps replace branches with more sophisticated self-service ATM locations. The Chairman Powell further commented that in order to enforce banking access in underserved locations, changes to the Community Reinvestment Act (CRA) may be needed:
Powell said he hoped a debate over change to the CRA would lead to a law that would “more effectively encourage banks to seek opportunities in underserved areas.”
He said he felt the Fed’s move to lighten regulations on community banks could help by keeping more of them in business.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group