Digital Banking Can Save Rural America from the Loss of Bank Branches

by
Adam Rust

I believe that rural America should seize the opportunity of fintech to counter some of the effects of big banks exodus from their communities.

Branchless digital banks and branchless communities should be a natural fit. The former have workable solutions but need customers if they are to survive. The latter have customers but are witnessing the withdrawal of banks.

Over the course of the period from 2008 to 2017, banks closed more than 10 percent of their branches. In Nevada, the number of branches fell 18 percent. The National Community Reinvestment Coalition estimated that these closures – 9,666 in all – created ten new banking deserts. Interesting enough, significant clusters of closures also occurred in major urban areas, too. Approximately one of every four branches in Baltimore County, Maryland, closed during NCRC’s study period.

Meantime, cellphone data providers continue to increase their coverage areas. Indeed, both AT&T and T-Mobile have already announced that they intend to begin rollout of 5G before the end of the year. In my state, where demographers classify 85 of 100 counties as rural, the only sizable gaps in T-Mobile’s 4G coverage exist in the mountainous portions of the western part of our state. Many of those areas are state parks, state forests, or national parks. It is hard to find a space in the eastern part of North Carolina that does not have coverage. Many people would have to drive ten miles to find a branch bank, but the same cannot be said for their ability to access high-speed data on their smartphone.

The FDIC says that the majority of the unbanked have no intention of applying for a new account, but the motive for their purpose stems from dissatisfactions that can be traced back to their previous experiences with a traditional bank. Part of it stems from a perceived lack of fit between their needs and the products on offer: Many contend that they don’t have enough money to avoid high fees. Another common perspective says they believe the charges are unpredictable and too high. There is a widespread lack of trust. Others point to problems with branches themselves – the hours are too short, and the locations are inconvenient. The traditional bank is ripe for disruption.

If rural customers migrated to digital banks, they would not suffer from sub-optimal products. The argument can be made that they would do better. Because digital-only banks have to compete everywhere and they generally do so by passing on the savings from not having a branch network to their customers in the form of lower fees and better interest rates on savings. Wells Fargo offers branches and 1/100ths of a percent on savings to its customers. The national average among traditional banks is 0.1 percent. Varo and Empower offer access to free ATMs, fee-free services, and interest rates that approach the rates on 10-year Treasury bonds. Today, 10-year Treasuries (ticker TNX) pay 2.16 percent. By contrast, Varo is offering 2.12 percent on savings right now. Empower’s savings account pays 2.15 percent. The difference is night and day, and the balance favors the digital banks.

While I think the value proposition stands on its own, it remains a hard sell with many rural opinion makers. I recently spoke with a City Council representative from a rural county in Eastern North Carolina who insisted that the real problem was access to cash. I can see her point – as the number of physical branches dwindles, the distance it takes to get cash increases. In her community, the local bank had left. Those who wanted cash went to the Dollar General.

Still, digital banks do not have to serve everyone better to justify their place within the solution set for bank branch closures in rural America. If a person prefers to bank with a branch and one exists nearby, then there is no reason to change. If a digital bank introduces someone who might otherwise have stayed on the sidelines, it represents a win.

Reducing the number of unbanked consumers in rural America isn’t a zero-sum game. The digital and physical models can co-exist. With luck, they should be able to foster a complementary effect that reduces the number of unbanked in a way that will be more effective than if either tried to do so without the other.

Two Excellent Options for Digital Bank Accounts
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Challenging the Narrative of the Digital Divide

True, critics will contend that rural America will never embrace digital banking until it overcomes the problem of the digital divide.

However, what is the digital divide? The answer is home broadband. Rural Americans are more likely to have a smartphone than home broadband. The digital divide narrows in terms of smartphone and tablet utilization.

Digital banks, who rely on the value of their apps to run their businesses, stand a better chance of providing the technology that matches the points of access in rural banks. Small community banks tend to lag in things like apps – creating a technological mismatch between their services and the digital capabilities of their customers. Most rural banks do have an internet presence, but far fewer invest in their mobile offerings.

Let’s review the digital offerings of some of North Carolina’s eleven smallest banks (smallest asset sizes):

Hertford Savings Bank – one ATM, no online banking, no app.

Jackson Savings Bank: two branches, no online banking, no app.

• Black Mountain Savings Bank: no website, no online banking, one branch, no app

Tarboro Savings Bank: has online banking, one branch, no app.

First Savings and Loan: one branch, no online banking, no app.

Roanoke Rapids Savings Bank: two branches, access to Allpoint network, no app but has online banking.

First Capital Bank (Laurinburg, NC): three branches, has online banking and an app.

Morganton Savings Bank: one branch, has online banking and an app.

Belmont Federal Savings and Loan: one branch, has online banking, no app.

Taylorsville Savings Bank: three branches, has online banking and an app.

Wake Forest Federal Savings and Loan: one branch, has online banking but no app.

Most digital banks choose to pay the cost of joining a fee-free ATM network, and as a result, they can give customers access to a broader network of free ATMs than would be available to a depositor at a single-branch small bank. The apps provided by those digital banks can deposit checks, too.

My point is that many rural banks have little in the way of a digital presence, a situation that is underscored by the difficulties many small banks are having in general. Demand in rural areas for mortgages has fallen. The trend among high-skill workers to seek better-paying opportunities in large cities has not subsided, and as a result, local banks have a harder time finding higher-income depositors. The banks still have to fight the fraudsters who seek a vulnerable entry point in the banking system. It’s a worst-case scenario: profit opportunities are dwindling, but compliance costs are increasing.

As if to provide the example that speaks to the meta-narrative, look to the story of CBW and Moven. A few years ago, a group of former Googlers bought Central Bank of Weir, Kansas. They kept the existing branch, so the bank’s existing customer (s) may not see much of a difference. With CBW’s charger, they launched Moven, one of the more exciting new digital banks.

Consumers may see the lack of these services and decide to walk with their feet to the nearest smartphone bank.

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