The rise of internet banking is making itself felt in an unexpected area: American civil-rights law.
Before the financial crisis, bank branches in the US multiplied like Starbucks locations. Now they’re dwindlinglikeRadioshacks. During the boom, bankslargelyexcluded minority and working-classcommunitiesfrom new branch openings. Sincethen,they’ve beentargeting themfirstfor branch closures, as a means of cutting costsamid falling foot traffic.
Enacted in 1977, the Community Reinvestment Act (CRA) was a federal response todecades of redlining—a type of racial and economic segregation best known for a legacy ofdenying mortgagesto black people—anda tool to discouragebanks from such unfairness. It penalizesbanks that don’tprovide certain levels of service to low-incomecommunities.
But with the increasing popularity ofmobile and online banking, regulators have proposed an updateto the CRA that would give less weighttophysical branches. This isdespite concerns that doing sowill perpetuate discrimination against minorities and the poor—as well as letting banks off the hook for decades of such discrimination in the past.
“There ought to be some caution,” said Bob Dickerson, board chairman of the National Community Reinvestment Coalition (NCRC), which opposes the shift(pdf). “Our communities need banks that have a physical presence as well as an online presence.”
The limitedpowers of bank regulation
A key provision of the CRA, the “service test,”gauges how much banks are serving their communities. How many branches a bank has in lower-income areas weighs heavily in the determination of whether it passes or fails that test. If it fails the service test and other parts of the CRA examination, then regulators have more power to block expansions or mergers.
Under theproposed rule change (pdf, p.3), the distribution of bank branches would still be afactorin theservice test, but would no longer be the “primary emphasis.” Gaining greater weightwould be “alternative”systems like ATMs and digital banking. The proposed rewording was submitted in September and the comment period ended months ago, butregulators haven’t come out with a final rule yet.
Dickerson, the NCRC chairman, got his start in banking in the late 1970s in Mississippi and Alabama, and he remembers thatbank branches weren’t equal in distribution or even quality. (“This is a 30-year problem,” hetoldQuartz.) When he worked for Deposit Guaranty Bank, apredecessor of today’sRegions Bank, in Jackson, Mississippi, the differences were stark. The downtown branch, close to the city’s commercial center, was far nicer thanthe one he worked at in a poorer, blacker neighborhood.“My branch was so small that when my secretary was getting ready to get up, her chair bumped my desk,” he said.
Though the CRA is explicitlyabout economic discrimination, not racial discrimination, the government has used the law toprosecute banks for explicitly racial discrimination in the past. In 1994, the Justice Departmentsettled charges with Virginia’sChevy Chase Bank because it didn’tmarkettocustomers or open branches in Washington DC’s black neighborhoods, despite them being included in its CRA service area.
Butbanks seem to get in a lot less trouble under the law than they used to. For most banks, there are four possible CRA ratings: “outstanding,” “satisfactory,” “needs improvement,” and “substantial noncompliance” (large banks get a high or low satisfactory rating). The bottom tworatings canhave problems when theywant to expand or merge, though fewer and fewer banks are receiving themthese days.
On its face, this suggests banks areactually getting better. But some critics of the CRA say(paywall) thatit encourages “tokenistic” compliance with the rules,ratherthan demonstrable improvements in the availability of credit or banking services in lower-incomecommunities.
What’s certainly true is that the CRA’s powers are limited. It can put pressure on banks with plansto expand,such asBBVA Compass, the last high-profile bank to fall foul of the CRA, which promised $11 billionin loansanddevelopment funds to poorer communities after getting a”needs to improve” rating last year. But the consequences of a low rating are less clear for banks that have no ambition to add branches or merge with another institution.
Reynolds State Bank, a small lender in Reynolds, Illinois, for example, has received seven “substantial noncompliance” ratingsin a rowsince 2006, with no discernible impact on its operations, though it has recently launched a website and is planning a mobile banking app.“We regard it as significant and important and we’re trying to correct it,” a representative from the bank told Quartz regarding its CRA ratings.
In this context,opponents of changing the CRA argue that it’s too weak already. “I don’t think that the regulators are tough enough, nor is there a penalty for not complying,” Dickerson said.
The hidden downsideof the mobile revolution
On its face, a change to bring theCRA in line with modern technology makes sense. For example, among Americans who have bank accounts, both young peopleand people of color are more likely to use mobile banking than their older or whiter peers,according to the Federal Reserve(pdf, p. 12).
That seems heartening at first sight, since the young and people of colorare morelikely to be missing from the mainstream financial system in the first place. They’re likelier to be either unbanked (have no bank account) or underbanked (have a bank account but still use alternative financial services like money orders, check cashers, and payday loans), according to a 2013 survey(pdf, p. 16)by theFederal Deposit Insurance Corporation (FDIC).
However, these statistics conceal a problem. A big reason that the young and people of color are more likely to use mobile banking is thatthey’remore likely to own a smartphone (according to arecent Pew Research Center studyon smartphone use). And that’s partly because their phones aremore likely to be their only way to get onto the internet.
Withlower incomes on average, these groupsare also a lot more likely than their older, whiter peers to run into data caps, or suspend or cancel their phone plans because they were too expensive, the Pew study found. If they don’t have a bank branch nearby, that leaves them without a way to access their accounts—and with yet another obstacle to being part of the mainstream financial system.
Why bank branches still matter
So the central question with the CRA shuffle is: Do bank branches matter if some of the people who weren’t being served by banksbefore are finding ways to connect with themwith using newer, digital methods?
The answer: It depends.
On the one hand,mobile and online banking are very good for giving people access to everyday bank stuff. A Gallup poll in 2013showed people were more than happy to do a lot of the run-of-the-mill interactionsonline.
For example, Hope Credit Union in Jackson, Mississippi, whichmainlyserves low-income, minority, and rural communities, debuteda mobile app for its members in 2012. (Credit unions are different from banks in that they are not-for-profit, offer a different deposit insurance structure, and typically serve a far narrower customer base, but they’re stillessentially in the same business of taking deposits and making loans.) Ed Sivak, Hope’schief spokesman and policy director, told Quartz that the app has been catching on quickly with its members.
“The mobile app is really important, he said. “It’s a financial education tool.” The most popular feature is the one that lets users check their balances, he said. The Fed’s findings agree:
Manybanks therefore think the revised CRA should give them credit for reaching the underbanked via mobile apps and online banking.
“Given the speed at which technological changes are altering how consumers bank, we strongly agree that consideration for newer delivery channels—especially digital channels—should receive greater consideration in the CRA evaluation,”wrote Capital One(pdf)in a letter to regulators. TheAmerican Bankers Association(pdf)andJPMorgan Chase(pdf) had similar views.
But you can only do so much on your phone. That same Gallup poll showed that Americans like going into a branch forbig-ticket items, like opening accounts and applying for loans.
Another survey, by the FDIC, found that overall, online banking is just barely more popular than branches as people’s main means of interaction with their bank.And mobile banking trails far behind.
Moreover, the FDIC found, the less moneypeople make, the likelier they are to use a branch and less likely to use online or mobile banking.
Aproblem of trust
There are also more structural reasons that a bank branch is important.In a 2011 commentary, researchers at the Federal Reserve Bank ofCleveland asked “Do bank branches matter anymore?” Their work focused on how lending decisions get made.They found thatinthe mortgage market, bond investors and market datamore heavily influence who gets credit. But inconsumer and business lending in poor and minority communities, a bank’s physical presence plays a bigger role. The intangible bits of knowledge that come out of dealing with a given population day in and day out go a long way for marginal customers, who might otherwise get weeded out with an algorithm.
A paper out of MIT’s economics department last yearexplored the issue further. It found that when banks merged, consolidatedbranches, and dropped parts of their combinedloan portfolios, those same underbanked neighborhoods often had a harder time getting loans because of those lost relationships.
Last but certainly not least, a bank branch is a marker of a neighborhood’s perceivedcommercial and existentialvalue. In a 2013NPR pieceon so-called “bank deserts,” Catherine Crosby of Dayton, Ohio’s Human Relations Council traced anarc of disinvestment on the city’s westside that concluded witha PNC Bank branch closing up shop:”So we had our jobs leave and so then we had our grocery store leave and now we had our bank leave.”
Jeanne Hogarth, a vice president for policy at the Center for Financial Services Innovation, saidthe banks’ lack of branches in areas where the unbanked live changes the way that peopleinteract with them.“Banks are not a presence in these communities,” she told Quartz. “People don’t grow up going to the bank every week. Mom and dad don’t have bank accounts.”
In addition, overdraft fees, minimum balance fees, and risk management toolslike ChexSystems—which block “problem” customers from opening new accounts—foment a distrust in low-incomehouseholds. This makes it harder to get people back into a branch, if there is one in the first place.
When people from poor backgrounds or minorities say why they prefer mobile banking, Hogarth says, “there is one reason that keeps coming up in the top three reasons: I don’t like working with banks.”
And Sivak, the policy head from Hope, said that despitetheirgrowing popularity, smartphones and computer screens won’t be enough to bridgethat divide.Most Hope members still come to a branch to conduct business.“I think it would be hard to establish the trust that a community needs simply through a mobile interface,” hesaid.
Don’t get carried away
The FDIC, in a report last year(pdf), asked how much mobile and online banking coulddo to bring the unbanked and underbanked into the financial system. There was lots to be optimistic about: Digital banking already has created more access, easier access, and faster access to basic financial services. But the report also recognized the technology’s limitations.
“Relying exclusively on a mobile device for a relationship with a bank is unlikely to fully achieve the economic inclusion objectives of fostering financial empowerment, growing banking relationships, and fulfilling financial goals,” it read. “Instead, other delivery channels, particularly human interaction, are likely to be important for providing consumers the support and guidance they need.”
Mobile and online banking ischeaper for banks, and it’s good at delivering some basic services. But it’s lessgoodforthe kind of meaningfulbanking activity the CRAwas meant to encourage. And that goal of the CRAis precisely what regulatorsnow seem poised to water down.
