Why the US has so many banking institutions?
In my country there are 43 financial institutions for around 50M people (around 1,106,000 people per bank). That makes things easier as it’s usual to find an ATM or branch of your bank nearby everywhere you go, even in small towns.
In the US there are around 4,400 banks for 334M people (75,000 people) per bank.
Why is the number so high? Does that make things harder or easier in regards of services and support assistance of your financial products?
23 comments
Local banks and credit unions are quite popular. We are also a wealthy country with robust competition, and despite what some folks say relatively mild government regulation.
Different laws for [regulation](https://en.wikipedia.org/wiki/Bank_regulation_in_the_United_States).
> Does that make things harder or easier in regards of services and support assistance of your financial products?
I’m not sure what you mean, but having competition for financial products is generally good for consumers.
A lot of them are local credit unions.
Those tend to offer better interest rates for loans and savings.
The trade off is not having national ATMs.
Many countries don’t allow community banks to be opened. The U.S. does, and thousands of U.S. banks serve one community and may have only one branch, or possibly two or three in the same area.
Furthermore, all 50 states can issue their own bank licenses. So there are many banks that are larger than one community, but still only operate in one state.
This used to be even more common. During the Great Depression laws were passed that made it essentially impossible to do interstate banking. While those laws have long since been relaxed, many Americans still distrust big nationwide banks and prefer to do business with smaller banks in their state or community. (If you want to see why many Americans prefer smaller banks, just watch the 1946 movie *It’s a Wonderful Life*, which romanticizes the small savings & loan and demonizes the bigger bank.)
Even after laws prohibiting nationwide banks were relaxed in the 1990s, we still have laws and regulations designed to prevent the big banks from swallowing up all the smaller banks. And another factor is trust in the Federal Deposit Insurance Company and the ability of the U.S. federal government to cover bank losses. Because of that trust, people in the U.S. aren’t scared to use smaller banks.
First, it’s easier to start a financial company in the US than many other countries that try to maintain an oligopoly.
Second, the Bank Holding Company Act of 1956 forbade banks headquartered in one state from operating in another. This led to a proliferation of institutions in each of the 50 states. The restrictions were repealed by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which unleashed a wave of consolidation across the country. Admittedly, by then, some banks already had a multistate presence via holding companies, but each bank had to be officially separate until then. Bank of America, for example, was a California only bank during this time.
Finally, there’s just a lot of money in American financial systems. Each of the Big Four in the US holds over a trillion in assets, dwarfing the whole economy of many countries worldwide.
Also keep in mind that historically, some parts of the country had laws that prohibited banks from operating in multiple counties or states, so this effectively mandated the idea of a small town bank even when the telephone already existed.
The US banking system was very decentralized for most of US history (and still is). It wasn’t until the 1860s that we had a universal national currency, used by every bank, and it wasn’t until the 1930s or so that we truly had a national banking system.
> Does that make things harder or easier in regards of services and support assistance of your financial products?
There’s far more competition which is a good thing, but the decentralization can make things hard. While all banks are linked together, and money can be transferred between them electronically. But the system is slow, old and well… decentralized. It’s one of the big reasons we don’t have an instant payment system between banks. 4400 financial institutions all would have invest in the technology to do it, and many are small local banks and credit unions that don’t have the capital to make the investment worth it.
We have a lot of regional and local banks. We approach banking like we approach policing, in other words.
There are lots of local banks and credit unions because it’s relatively easy to create one compared to many countries.
On the ATM thing: many offer free use of other ATM networks, either through agreements with them or reimbursement where that’s lacking, and frankly quite a few people don’t care much about cash and only carry some as a backup if at all so…they’re really not a big concern.
Damn, I’m over here thinking that since 2008 we had relatively few, as far as major banks go.
We’re rich, and we’re spread out. Also, we tend to trust our neighbors more than we trust people 1000 miles (1609 km) away.
So a farmer in Kansas would rather put his money in his local bank instead of some big bank headquartered in New York. Not that his bank isn’t *owned* by one of the big banking corporations, but as long as it’s called “Backwater Federal Savings Bank” he’s happy. He doesn’t know or care who owns it.
Then Citigroup sees that JPMorgan Chase owns a bank in Backwater, Kansas that’s pretty successful, so they open one called First Farmer’s Bank of Backwater. And then Wells Fargo sees those two, and so on, and eventually we have five banks in Backwater, Kansas. And every customer of each one of those banks is happy that *their* bank is the friendly local bank.
As far as services and support go, having good service and support is what lets smaller banks retain customers. I use a local bank because they’re friendly and helpful and they contribute to local charities. This bank only exists in my city.
When I was traveling across the country a lot I used Bank of America because they did have locations in most states. They opened a savings account attached to my checking account without asking me and charged me $5 a month until I closed it and spent way too long arguing that I wanted my money back. They’re not allowed to do that, but what did they care? They got $5 a month from anyone who didn’t pay attention and customers are nothing but a great big statistic.
Competition and options
Many banks are small. Some only serve a few thousand customers in a small area. That’s especially important in rural areas. Not every bank wants hundreds or thousands of branches all over the country.
To quote that bank robber,
“Because that’s where the money is.”
It does seem there are a lot of branches for multiple banks in my area. I haven’t been inside my bank for years. I can drive up to the ATM or more commonly I just get cash back at the grocery store.
There are lots of local and smaller banks, like credit unions. There has actually been massive consolidation over the past 30 years or so.
It was even odder here in Illlinois… I remember when I was a kid and banks in Illinois had to all be single branch (per 1870 state constitution)! This was only slightly changed to allow for a drive-through banking location w/in 1500 feet of main branch.
There are shared networks for ATMs, many smaller banks rebate fees charged for using other banks’ ATM, so it’s not much of an issue to bank away from home.
Interstate banking was illegal until a few decades ago.
Quick scroll through your comments has me guessing you’re French. It’s not just about population, it’s also location.
France is the size of one state. In the US, each area settled usually started their own bank once a town was established. Some conglomerated, some did not. When you’re settling a country the size of Europe, that translates to a lot of small banks.
In that same time period, France’s government has fallen multiple times, two world wars removed a lot of competition, and the currency has changed. There was incentive and need to modernize and consolidate. That didn’t happen in the US. Sure some banks did, but lots of small town banks are content staying small town banks.
I bet a lot of it has to do with the size…not the population.
I bank with a regional credit union. Its really nice.
We have more than four thousand credit unions in addition to the more than four thousand banks. These numbers used to be even larger.
For most purposes it does not present any problems. We have only a few card networks, so you can use a credit or debit card from any issuer at any merchant that takes cards. The ACH system is virtually universal so you can receive direct deposit of your wages or make bill payments even if your employer/biller has never even heard of the bank you use.
Using a smaller financial institution might make it hard to find a branch or ATM, but they are rarely needed as purchases can be made with cards and you do everything else with online banking. Smaller banks often participate in ATM networks and credit unions go even further with shared branches just in case you need one.
Competition should make things better, but it may be strange which type of bank wins. The larger banks usually have the best credit card rewards and new account bonuses. However, the best deposit accounts are from smaller financial institutions (though most of the smaller banks aren’t very good for deposits either).
Competition makes institutions better than they would be otherwise.
MURICA FUCK YEAH!