Financial institutions open Detroit area locations based on racial makeup

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The placement of banks, credit unions and alternative financial services is significantly influenced by changes in the neighborhoods' racial composition, even when factors like income and poverty are taken into account, according to a new University of Michigan study.

The research sheds light on the racialized strategies of financial institutions, highlighting their significant role in shaping neighborhood demographics and economic opportunities. The study focused on developments in the Detroit area—involving six counties—from 2000 to 2016. The results are published in the journal Critical Sociology.

"These insights challenge common misconceptions about the demand for high-cost financial services and underscore the broader impact of financial institutions on community dynamics," said Terri Friedline, U-M professor of social work and the study's first author. Co-authors are Jones Adu-Mensah and Xanthippe Wedel.

Financial institutions follow changes in racial makeup. This is evident from the analysis, which showed shifts rather than reductions in racialized financial service locations after the Great Recession, say Friedline and colleagues.

The study showed that white communities benefited from lower financial management costs as they saw fewer alternative financial services but more stable traditional financial services. In contrast, neighborhoods with increasing Black populations are more likely to face a rise in alternative financial services and a decline in traditional financial services, which may lead to higher financial management costs.

Banks and credit unions tend to withdraw from areas as Black populations grow, whereas alternative financial services target these areas, following nuanced shifts in racial demographics, the researchers say.

The study also found that changes in neighborhood racial makeup precede the opening of payday lenders and other alternative financial services. This means financial institutions create racialized markets by adjusting their locations, say Friedline and colleagues.

"Some may argue that payday lenders open storefronts in ways that respond to market demand, but this argument is rooted in a disingenuous interpretation of demand," Friedline said.

The researchers say the study did not factor how residents were affected by digital technologies, such as online and mobile banking.

More information: Terri Friedline et al, Census Tract and Neighborhood Racial Change and the Locational Decisions of Financial Services in Metro Detroit, Critical Sociology (2024). DOI: 10.1177/08969205241287127

Provided by University of Michigan