Challenges and solutions to financial services in rural areas

There are several benefits of choosing rural life. You can live in a tighter-knit community, have room to spread out, and enjoy a lower cost of living. However, rural life also comes with significant drawbacks. Rural residents are more likely to live in banking deserts, where the nearest bank is more than 10 miles from the center of the census tract. This means they have to travel farther to receive financial services. People in rural communities are also more likely to need physical banking branches, possibly because of limited access to high-speed internet. 

Several key factors contribute to the baking desert phenomenon in rural areas. Here are a few reasons why people in rural areas struggle with banking access and solutions to address these issues. 

Bank closures

An estimated 4.5% of Americans are unbanked, meaning they don’t manage their money through a financial institution. This number is often higher in poorer rural communities. Thousands of bank branches closed during the 2008 recession to increase profitability, many in rural communities. This left some people without any banking options. 

However, bank closures aren’t the only reason people are unbanked. Many banks require deposits to open accounts, and some families don’t have enough money on hand to open or maintain accounts. 

The closure of national bank branches causes residents to rely on smaller banks and local credit unions. While these offer lifelines to rural residents, they aren’t always easy to access. Going to the bank isn’t as easy in a rural area. Reaching the bank on-way could take more than an hour, causing customers to miss work and lose several hours of the day. 

Difficulty accessing credit

Americans with limited bank access are also unable to build their credit. Research shows that people in rural communities are less likely to have credit scores and instead rely on non-bank options from sources like payday loans and pawn shops. 

There are a few other reasons why rural residents have poor or limited credit:

• They’re more likely to have lower income levels. 
• They’re more likely to be older. 
• Rural communities have less diverse economies, which means they’re more affected by economic shocks. 

Poor credit creates a snowball effect that further limits financial options. For example, if this is a bad year for certain crops, farmers will have a harder time getting money for short-term income gaps or loans to diversify into other produce. They’ll either have to rely on non-bank lenders or pay higher interest rates, making the loans more expensive and harder to pay off.   

Energy insecurity 

More than 30 million American households experience energy insecurity, which means they cannot meet their energy needs. Causes of energy insecurity can range from poverty, where utility services get shut off due to missed payments, to poor or limited infrastructure. The average household allocates 3.1% of its monthly budget to energy, which jumps to 8.1% in energy-insecure homes.   

Access to modern utilities also affects banking. Not only is digital banking limited if electric power is unreliable, but residents also need internet services they can count on. Many rural communities are also considered digital deserts where they can’t purchase high-speed internet at any price.  

Improving access to financial services in rural areas   

Many organizations and governments are taking steps to improve access to financial services in rural communities. These groups increasingly understand that there isn’t a single factor contributing to a lack of financial access and banking tools. They need to take a multi-pronged approach to barrier reduction. Here are a few solutions that are helping rural Americans.  

Expansion of digital services 

Rural residents are more likely to visit physical bank branches because they cannot get the services they need online. This may be due to a lack of high-speed internet or cell service or simply that the banks haven’t moved all of their services online.  

One of the first barriers to remove is access to digital banking. This starts with the financial institutions themselves. Banks need to expand the number of services they offer online, while smaller credit unions need to develop online tools and embrace mobile apps. 

The next step is to encourage people to adopt digital banking tools. The number of people with bank accounts increased during the COVID-19 pandemic as Americans opened accounts to receive stimulus funds. This is a good first step. 

The final step is to increase internet access. This will allow rural residents to bank from their phones at home. Fortunately, there are bipartisan efforts to address this and more communities will soon have high-speed internet than ever before.  

Adoption of solar and other renewables  

Americans can’t access the internet without electricity, so addressing energy insecurity is essential to providing financial services to rural areas. One way to bring energy to rural residents is through microgrids. 

Microgrids use community-owned, locally-produced solar energy to support rural communities. These smaller grids provide more stability if natural disasters threaten the power grid. When the power goes out, rural communities are often the last ones to have it restored. Microgrids allow these areas to manage their own power source and make repairs whenever needed.

While solar energy is a tremendous opportunity for rural communities, installing it may come with some challenges. Materials may take longer to ship to their destinations and communities might have specific needs based on the environment. Rural terrain isn’t always flat, making it hard to install panels. Ground mounts might need to be built on rocky terrain that is uneven and difficult to balance panels on. Site selection is a key part of developing solar microgrids, so communities need to come together to identify where they want their solar infrastructure.    

Another issue can be cost. Fortunately, the Inflation Reduction Act allocated $11 billion to bring clean energy to rural areas. It also contributed $2 billion to the Rural Energy for America Program (REAP), which supports initiatives to invest in renewable energy or upgrade inefficient systems. 

Regulators have the power to support solar expansion and make access to energy cleaner, more sustainable, and better than ever before for rural Americans. 

Prioritization of financial education

Finally, community organizations need to invest in financial education to help residents choose affordable banking options. Rural Americans are more likely to fall for predatory lending options because they don’t have physical bank locations. They’re also less likely to be aware of or utilize consumer financial protection tools if they are scammed.

Financial institutions and community leaders need to help people learn how to bank digitally and access online tools. They also need to warn their friends and neighbors about the high cost of payday loans.   

Basic financial education can help rural Americans make smarter financial decisions so they save and grow their money instead of staying in a cycle where they constantly have to pay off expensive loans. 

Bottom line

There isn’t a single solution to improving financial resources in rural communities. Banks, utility providers, and community leaders need to collaborate to ensure that rural money management is accessible, affordable, and valuable.