Alternative financial service providers and the spatial void hypothesis

Abstract

This paper studies the spatial relationship between traditional banking services (Banks) and alternative financial service providers (AFSPs). The main objective is to test the so-called spatial void hypothesis that AFSPs tend to locate in markets where traditional banking services are under-provided. The key question of interest here is whether or not AFSPs serve markets with significantly lower income levels than those of Banks. A statistical methodology is developed for addressing this question that builds on previous studies. The present approach is based largely on K-function analyses of both individual and paired point patterns. These Monte Carlo testing procedures are applied to Banks and AFSPs in the four-county region around Philadelphia, Pennsylvania, and are also compared with previous methods. The main finding of this research is that there is indeed strong empirical support for the spatial void hypothesis in this Philadelphia region.

Proximate Landscapes of Economic Inclusion in Southeastern Pennsylvania

“…Avery et al (1997) found that between 1985 and 1995, two thirds of bank branch closures in the United States occurred in lowto moderate-income neighborhoods. The spatial void hypothesis suggests that AFSPs are more likely to locate in areas where traditional banking services are underprovided (Temkin and Sawyer 2004;Smith, Smith, and Wackes 2008).…”

“…Counties where a large portion of the population lack a credit score or have a credit score that would place them in the subprime category are found to have a greater density of AFSPs (Prager 2009). Smith, Smith, and Wackes (2008) examined the spatial clustering of AFSPs in Philadelphia County. The authors found support for the spatial void hypothesis and found that AFSPs are clustered in minority areas.…”

“…Studies conducted thus far have examined disparities based on the presence or absence of facilities in areal units or buffers (Graves 2003;Temkin and Sawyer 2004;Graves and Peterson 2005), clusters of AFSPs (Smith, Smith, and Wackes 2008), or by the calculating the density of AFSPs per population (Prager 2009). The analysis carried out in this study improves on previous research in this field methodologically by utilizing a Euclidian distance-based approach rather than a spatial coincidence approach.…”

Minorities on the Margins? The Spatial Organization of Fringe Banking Services

“…The spatial organization of traditional and fringe banks may influence who uses their services. A number of studies suggest that traditional banking services tend to locate in white, upper‐income communities, having abandoned to fringe providers the low‐income neighborhoods where minorities or immigrants disproportionately reside (Burkey & Simkins, 2004; Graves, 2003; Kolb, 1999; Oron, 2006; Smith et al, 2008; Stegman & Faris, 2001; Temkin & Sawyer, 2004). This perspective, called the “Spatial Void Hypothesis,” contends that fringe providers exploit the market niche that is vacated (or left vacant) by traditional providers—a niche that primarily serves low‐income households and minorities by locating in those communities.…”

“…Racial and ethnic minorities are disproportionate users of fringe banks, thus exacerbating the inequity of a bifurcated financial system and regressive fee structure. Case studies in select large cities have found that fringe services are more geographically accessible to predominantly minority neighborhoods while traditional banks are more accessible to white neighborhoods (Burkey & Simkins, 2004; Graves, 2003; King, Li, Davis, & Ernst, 2005; Smith, Smith & Wackes, 2008; Squires & O’Connor, 1998; Temkin & Sawyer, 2004). However, many of these studies have focused on African Americans, or collapsed all racial and ethnic minorities into a single nonwhite category, presumably because the population of specific ethnic groups was insufficient for analysis (Gallmeyer & Roberts, 2009; Graves, 2003; King et al, 2005; Orfield, 2009).…”