I asked my colleague, Mehrsa Baradaran, to comment on some recent news out of the USPS. Here are her excellent insights:
Two years ago, I wrote an article about how the poor are not being properly served by the banking sector, suggesting the outlandish idea that the U.S. Postal Service could help by offering loans and other financial services. Imagine my delight this week when the Office of the Inspector General of the USPS came out with a white paper suggesting more or less the same thing! Immediately, American Banker called it the“worst idea since Edsel.” (the infamous Ford marketing disaster). The main criticism is that the USPS should focus on what it does best (er, or more accurately, what it does) and that it’s dangerous to let non-banks provide bank-like services. (Sound familiar?)There are good reasons to be concerned about the USPS entering financial services. We certainly would not want to create another federally subsidized GSE. And we may need to be convinced that a bloated government agency that’s been hemorrhaging tax dollars for years can run anything well. However, there are several hurdles to banking the poor that the post office can uniquely overcome.
So in the spirit of buzzfeed lists and magazine covers, here are the top 5 reasons that postal (non-)banking is a great idea whose time has come:
1. Location, Location, Location: When mainstream commercial banks and thrifts started facing intense market competition in the 1970s and 1980s, they deserted low-income neighborhoods en-masse and basically stopped lending there. This is what the Community Reinvestment Act (CRA) is meant to address. When the banking establishment left, the fringe banks moved in. In many low-income neighborhoods, payday lenders are the only establishments offering credit. But you know who is still there? That’s right, your local post office.
2. Your local post office is more inviting than your local bank: Another documented reasons the poor avoid banks is that they feel certain race/class/language barriers--they just don’t feel comfortable there. Payday lenders are different—they have a façade of informality (which masks their large corporate structures). They speak your language and are located in the strip mall you frequent. The post office doesn’t have a stiff formality like most mainstream banks and can overcome some of these cultural barriers because it serves a diverse array of customers.
3. Postal banking used to happen in the US and still happens abroad: President Grant suggested and President Taft initiated post office savings accounts in the early 1900s. The Postal Savings accounts were created and geared to recent immigrants and the unbanked poor, and were widely successful—at the end of the first year, there was a total of $20 million in deposits, most of which had been coaxed out of hiding. Many other countries use their postal service to provide credit and savings to their citizens (though not necessarily the poor), including: Japan, Germany, China, Brazil, Israel, France, Korea, India, South Africa, Kenya, and Sri Lanka.
4. They would fill a market gap: A recent FDIC study found that over half the population could not access $2000 in the event of an emergency and that about 30% is either unbanked or underbanked. In fact, this problem is at the top of the FDIC’s agenda this year. Banks do not offer the types of small loans the poor need--it’s just not profitable. For a bank, the cost of making a $1000 loan or a $100,000 loan is the same, but the returns on the latter are much greater. On the flip side, loans from payday lenders, with an average interest of 500%, are very costly to those who need them. Even check-cashing can cost the unbanked up to 5% of their paycheck (even if your paycheck is issued from the US military and is risk-free). A few corporations, like Wal-Mart, are beginning to offer basic financial services, but they are nowhere near market saturation. If the USPS can offer small loans and other simple transactional services at lower costs, they don’t put anyone out of business and they fill a real market need. How can they do this? (1) I don’t buy the argument that the poor are too high of a credit risk to serve--you just need to price for the risk. But the premiums charged by the fringe banks are just too high--as demonstrated by the fact that they are so profitable that many large banks have invested in these charters to boost their own revenue). (2) The post office can offer these services at a much lower cost because it would be using the infrastructure it already has with little marketing expenses and a large customer base. Yes, all these things are federal subsidies….and I’m perfectly comfortable with that.
5. The government should facilitate and subsidize access to credit for all people. Let’s face it, our banking system has always been and will always be a heavily-subsidized sector. And a big justification for these subsidies is that the populace gets something in return--I’ve called it a social contract. The state supports banks because we need them to provide credit, which allows companies and individuals to improve their economic position. But unfortunately, most of these subsidies (especially in the form of bailouts) flow to the largest banks who are not serving most of the public. Nor should we force them to; their job is to maximize profits for their shareholders and past attempts at enlisting large banks to service the poor have failed. So we have two banking systems: a subsidized one for the rich and middle class and the “wild west” for the poor. It wasn’t always this way. Credit Unions and S&Ls used to be subsidized by the US government to provide credit to the poor, but they stopped doing that a few decades ago. Since then, our government continues to subsidize banks, but those subsidies are not making their way to those who most need banking and credit services. This gap of services to the poor is a relatively new phenomenon and one that I believe the USPS should help to fill.
This proposal will likely garner significant opposition from the banking industry and from the payday lenders (see e.g. the media and lobbying firestorm surrounding Wal-Mart’s proposal to enter banking). But I, for one, am hoping that someday I can go cash a check at the post office on my way to UPS to drop off a package (the lines are much shorter).
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