Does Distance Matter in Banking?

  • Kenneth P. BrevoortEmail author
  • John D. Wolken


Deregulation and technological change have reduced the transaction costs that led to the dominance of local financial service suppliers, leading some to question whether distance still matters in banking. This debate has been particularly acute in small business banking, where transactions costs are believed to be particularly high. This paper provides a detailed review of the literature on distance in banking markets, highlighting the reasons why geographic proximity is believed to be important and examining the changes that may have affected its importance. Relying on new data from the 2003 Survey of Small Business Finances, we examine how distances between small firms and their financial service suppliers changed over the 1993–2003 decade. Our analysis reveals that distances increased, though the extent varied substantially across financial services and supplier types. Generally, increases were observed in the early half of the decade, while distances declined in the following 5 years. There was also a trend toward less in person interaction between small firms and their suppliers of financial services. Nevertheless, most relationships remained local, with a median distance of 5 miles in 2003. The results suggest that distance, while perhaps not as tyrannical as in the past, remains an important factor in banking.


Small Business Financial Service Geographic Proximity Median Distance Person Interaction 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.



The opinions expressed are those of the authors and do not necessarily reflect the views of the Federal Reserve Board or its staff. The authors would like to thank John Holmes for his outstanding research assistance.


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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Board of Governors of the Federal Reserve System, Division of Research and StatisticsWashingtonUSA

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