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Are brick-and-mortar bank branches still necessary?

Dan Bobkoff Dec 9, 2011

Tess Vigeland: I literally can’t remember the last time I visited a bank branch. In fact, my bank doesn’t even have any. People like me are one of the reasons brick-and-mortar branches are closing all over the place. But a recent study from SNL Financial found they’re shutting down more in poor neighborhoods than wealthier ones.

Reporter Dan Bobkoff of the public media project Changing Gears tells us what that means for those communities.

Dan Bobkoff: This former branch of Ohio Savings Bank is quickly becoming an eyesore in Lynne Alfred’s neighborhood.

Lynne Alfred: There’s litter and trash around. And, the paint is peeling.

The branch closed a year ago — a rent dispute, the bank said. Its $23 million in deposits were transferred miles away to other locations.

With its red brick and white columns, the branch served as a kind of grand landmark.

Alfred: Well, it was a magnificent gateway to the Larchmere area.

Lynne Alfred and her husband have lived in the area for years. She remembers when they needed a loan, they used to just walk to the branch.

Alfred: We would say, “Hi, Dee, this is what we want to do,” and she’d say, “Oh!”

The Alfreds got their mortgage there. Then, a home-equity line to finance the clothing and craft shop Lynne runs down the street.

Alfred: We’d sit down and talk about it and we’d fill out the paper work and that was it. It was just very easy, very friendly. We knew them and they knew us.

She’s not even sure the loan officers bothered with a credit score.

Emre Ergungor is a senior research economist with the Federal Reserve Bank of Cleveland. He said this kind of relationship reminds him of a movie shown a lot this time of year.

Emre Ergungor: If you go back many decades, if you go back to the time of “It’s a Wonderful Life” with George Bailey and his Building and Loan Association.

George Bailey: Mr and Mrs. Martini, welcome home.

Man: Good old George. He’s always making a speech.

Imagine your loan officer coming to your moving day.

Conventional wisdom these days is that online banking and credit scores make this kind of George Bailey-style relationship obsolete. But in research he’s done looking at branch closures in the Cleveland area, Ergungor finds that’s not always the case.

Ergungor: Those kinds of relationships still matter in a small corner of the lending world and that’s where the low-income individuals live.

Ergungor was surprised to learn how much losing a bank branch affects a lower income neighborhood like Larchmere, where half of all residents make less than $50,000 a year. Not only do locals find it harder to get loans, but loan defaults go up too.

Ergungor: It’s a no-win situation.

Ergungor thinks this is because credit scores are no substitute for the judgment of a local banker. A banker may know so-called “soft information,” like how a loan applicant’s employer is doing. Or, how they’ve handled unexpected expenses like emergency medical bills. That helps the bank make a better decision about who should get a loan. People can have the same credit score but completely different approaches to repaying their debts.

Ergungor: When you can separate low-credit risk people from high-credit risk people, and you can serve the needs of the low-credit risk people, you see that credit becomes more available because the bank takes less risk. And when the bank takes less risk, you see fewer defaults later on.

But here’s the thing: Even though it can be riskier for a bank to rely on credit scores alone, they often lose less money on defaults than it costs to keep a branch open.

Bill Mahnic teaches banking and finance at Case Western Reserve University.

Bill Mahnic: The only thing that goes through bank management’s mind is: Can we make money on that branch?

Community leader: First thing on the agenda is the Community Re-investment Act…

Many in the Cleveland’s Larchmere neighborhood believe their business should have been enough to keep their bank open. As their Ohio Savings branch was closing last year, one man collected 300 signatures protesting the move. That led to this group — fifteen or so community members meet regularly in churches or libraries to figure out ways to bring a brick-and-mortar bank back to their neighborhood.

Some like Alanna Ferguson worry not just about access to credit, but about the elderly and disabled who can’t get to other branches. And, worse, she worries the shuttered bank signals that the community is on the decline.

Alanna Ferguson: Perception is everything. And, if people perceive that there’s no money in the community, or no real concern about home improvement or maintaining property or doing financial transactions, then certainly it can give that kind of a perception.

And, perception can lead to reality. To avoid that, the group has petitioned the FDIC to downgrade its rating for Ohio Savings Bank in the hope of pressuring the bank to reopen the branch.

In Cleveland, I’m Dan Bobkoff for Marketplace Money.

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