Where and how customers bank makes a difference. (Photo: Marc Levy)

These days, when you walk into your bank to deposit your money, you probably just drop in, leave and move on with your day. Just a simple place for transactions, right? It turns out that the situation is not simple. Your individual decisions when it comes to banking choices – combined with those of so many others – has more of a societal impact than you may think. Where you choose to put your money says a lot about your personal values, and where your money goes matters in the context of local communities.

People pooling their money into big corporate banks at the expense of local communities is not new, but has grown particularly severe in recent years. The issue became so concerning recently that the Office of the Comptroller of the Currency, a top U.S. banking regulatory body, announced investigations to allow more scrutiny into mergers and the acquisition of smaller banks.

One such high-profile merger has been between Capitol One and Discovery. “Capital One is a notorious bad actor even at its current size, and should not be allowed to further concentrate market power,” said Jesse Van Tol, president and chief executive of the National Community Reinvestment Coalition, an organization made up of hundreds of development and finance nonprofits.

The empirical data mirrors these concerns. Local banks have faced a drastic decline in recent years as big banks increase their monopoly over the industry. A recent Federal Deposit Insurance Corp. study found that the percentage share of deposits in the 10 largest banks shot up to 82 percent in 2021 from 58 percent in 1994.

The organization also found that 90 percent of deposits were held across 87 banks in 1994. The same percentage of deposits now are held by 19 banks. 

Cambridge Local First sees three primary reasons for banking local.

Helping local businesses

Community banks have long been valuable partners to small businesses, which have been particularly hard-hit with decreasing economic activity since the onset of the Covid pandemic. In Cambridge, small-business revenue decreased by 74.9 percent at the beginning of the pandemic, according to a study by Harvard University.

Many don’t realize that community banks were a lifeline during this difficult time. About 60 percent of small-business loans approved by the Small Business Administration during the pandemic were issued by community banks with assets of $10 billion or less, according to the Federal Reserve System.

This was possible in part because local banks promote a unique sort of business owner-bank relationship – a connection not often found at corporate banks. Local banks also better address business owners’ needs. According to data from the FDIC, most of the local banks in the Cambridge area invest a majority (over 50 percent) of deposits in local communities, and most invest at least almost 50 percent of their money in Cambridge. 

Ensuring long-term sustainability

Besides helping local businesses and communities, banking local is better for the environment. Corporate banks have been some of the biggest offenders when it comes to the financing of fossil fuels, which puts them among the biggest contributors to fossil fuel emissions with corporate contributions that fundamentally contradict Paris Climate Agreement goals set forth in 2016, according to the Rainforest Action Group and Sierra Club. In terms of specific statistics, JPMorgan Chase and Citibank were the first- and second-biggest offenders in terms of money going toward fossil fuels. Morgan Stanley and Goldman Sachs ranked No. 12 ($51.3 billion) and No. 15 ($48.4 billion), respectively. These big banks are more concerned with profit-making than considering the real-world impacts of their decisions. 

Aid to marginalized communities

Another meaningful channel through which local banks help their communities is credit unions. As Investopedia explains, credit unions are locally based financial cooperatives that provide traditional banking services, but as nonprofits. This is significant because the primary goal is not to make money; credit unions just need to make enough to sustain operations. Although these institutions can vary in size, they are generally small and volunteer-operated. Credit unions tend to invest money in their communities too – some more than 75 percent of their revenue, and many of them in Massachusetts up to 100 percent. As a result of these characteristics, these unions can better focus on helping the clients they serve. Most help low-income people, communities of color and on affordable housing, making them crucial partners in helping ensuring equity. It’s an area in which big banks generally fail.

What can you do?

With all this information in mind, you may ask what you can do in response. If you’re a community leader, you can spread the word through collaborating organizations focused on promoting local development and businesses, including Cambridge Local First. If you’re an ordinary resident, your choices can make a huge impact too. 

It’s easy to switch your own deposits to local banks! The CLF Move Your Money webpage has resources available to talk about what this process looks like, as well as the various benefits of switching. 

David Xiong is a Cambridge Local First  intern.