What could Dollar General tell us about banking?

My colleague (and noted trade blogger) Dan Griswold pointed me to two recent articles which paint two very different portraits of rural…

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My colleague (and noted trade blogger) Dan Griswold pointed me to two recent articles which paint two very different portraits of rural America. One article discussed the rapid expansion of Dollar General, a grocery and sundries store, into small, less affluent towns. Dollar General focuses on helping consumers better meet their needs, including being able to buy products in smaller, cheaper packages than what is available at other groceries. The other article paints a dire picture banks leaving rural communities because it is no longer financially feasible to maintain a presence or make loans in the size needed by the community (unlike groceries, smaller loans are less profitable than larger ones). This exodus of banks risks cutting off from access to credit which in turn harms local businesses, creating an economic death spiral.

What separates these two stories? While there are many differences between retail and banking, a major one is the level of regulation. Dollar General is certainly regulated in areas like worker safety and fair hiring, but it doesn’t face anywhere near the burden of regulation born by banks; though to be fair Dollar General also doesn’t enjoy the government subsidies banks receive, such as deposit insurance, that ostensibly justify the regulation. This regulatory burden makes it hard for banks to afford to serve poor rural communities and extend smaller loans.

While regulation makes it hard for banks to serve poor communities, it also prevents Dollar General and similar firms from stepping into the breach. Dollar General and other companies might be able to extend financial services in some communities profitably, given their existing customer relationship, community presence, and lower overhead. However, under existing law it is both essential to become a bank to offer many financial services competitively on a national scale and yet almost impossible for a commercial firm to obtain a bank charter.

Opponents of mixing business and commerce worry about the potential threat to both banking and commercial competition and the risk that deposit insurance might inadvertently lead to the taxpayer subsidization of the firm’s commercial ventures. Likewise, opponents of providing regulatory relief to banks worry that bank failures will increase, placing the taxpayer on the hook and possibly threatening the stability of the financial system.

These concerns should be taken seriously and examined, but we also must consider the potential benefits of expanding access to financial services to consumers who are seeing their options evaporate. In addition, we must consider whether the economic costs of preventing access may be more destabilizing in the long run.

Some regulation of financial services, and who can provide them, is certainly justified. However we must consider whether, by contributing to making it financially nonviable for banks to serve poor communities, and making it impossible for commercial firms to serve as banks, our current regulatory system does more harm than good. While banks have struggled, Dollar General has succeeded by meeting their customers’ needs with a flexibility financial firms do not enjoy. There may be a lesson there.