29 Oct 2015

"For more than half a century, from 1911 until 1967, the Postal Service also served as a bank. Customers could walk down the street to the post office with their money and deposit it in a savings account there."

Americans don't spend nearly as much time at post offices as they used to, but that's not only because postcards are being replaced by Evites. For more than half a century, from 1911 until 1967, the Postal Service also served as a bank. Customers could walk down the street to the post office with their money and deposit it in a savings account there.
The system made sense back in those days, when the country was more sparsely populated and banks were harder to find, but post offices were everywhere. Over the past 50 years, though, the total number of bank branches in the United States increased from 16,000 to 83,000. What's more, people visit the bank less frequently these days, given the ubiquity of credit cards and direct deposit.
Still, there are still relatively few banks in many impoverished urban and rural neighborhoods, and Sen. Bernie Sanders (I-Vt.), a candidate for the Democratic presidential nomination, has a big idea for turning post offices back into banks. That's because he sees them as a place where the 68 million low-income Americans who currently rely on payday lenders and costly cash checking services could manage their affairs less expensively. (And banking might help the beleaguered Postal Service's bottom line as well.)
"What people are forced to do is go to payday lenders who charge outrageously high interest rates. You go to check-cashing places, which rip you off," Sanders said recently. "And, yes, I think that the Postal Service, in fact, can play an important role in providing modest types of banking service to folks who need it."
Postal banking is still a part of everyday life in many foreign countries, including the United Kingdom and France, and the U.S. postal inspector general issued a report endorsing the idea last year. The report argued the Postal Service should consider not only opening savings accounts again, but also expanding into short-term loans and debit cards as well.

Bricks and mortar

The inspector general also noted several reasons why the Postal Service might be able to help those on the margins of the American economy bank more cheaply. Start with payday lenders, whom Sanders and other proponents see as the villains in the dark tale of unconventional financial services. 
Maintaining a large volume of customers at each storefront is crucial for payday lending, according to a study of the industry published by the Federal Deposit Insurance Corporation. With more customers, lenders are able to defray the costs of keeping the lights on through lower interest rates. The most profitable payday lending branches have been open for a while and have established a base of customers in the neighborhood. The study found that on average, payday lending firms earn about nine cents on every dollar they loan.
The Postal Service already has locations all over the country, though, and everyone who walks in to buy stamps is a potential customer.
Another advantage is less tangible than bricks and mortar: trust, an invaluable resource for any financial institution. The Postal Service rates highly among government agencies in public opinion polls.
Perhaps above all, the Postal Service is an agency of the federal government. If borrowers failed to repay loans, the Treasury Department could seize their tax refunds at the end of the year, allowing post offices to limit their losses and offer more favorable interest rates than payday lenders.
Stiff rates
Those seizures would be part of another, more dour aspect of postal banking.
People have neighborly feelings about their local post office, and proponents argue that postal banking could protect the public from loan sharks. Yet as the inspector general's report makes clear, going to the Postal Service wouldn't exactly be like borrowing $20 from your grandma. In a hypothetical example considered in that report, the Postal Service offers loans at no less than 25 percent interest and seizes borrowers' money come April 15 if they don't pay up.
The inspector general argues that 25 percent interest is still far cheaper than the fees charged by payday lenders, typically equivalent to 400 percent at an annual rate or even more. It's hard to know whether Treasury's strong arm, combined with the Postal Service's existing infrastructure, could reduce costs enough to offer customers even that rate. 
One way the Postal Service could control costs would be by lending only to borrowers who have a good chance of repaying, said Mehrsa Baradaran, a legal scholar at the University of Georgia who has long advocated for postal banking.
She said that if the Postal Service begins lending money to Americans, the program shouldn't depend on funding from taxpayers to remain solvent.
"We've got to honor market principles," Baradaran said. "We're not going to offer a subsidy here."
Some economists worry that because every borrower is potentially a voter as well, any public agency lending money will hesitate to deny loans for political reasons.
"We will always have higher rates of default here, because we don't have investors with their money at stake," said Robert DeYoung, an economist at the University of Kansas.
In any case, if the Postal Service were to underwrite loans, it wouldn't really be competing with payday lenders at all. Underwriting takes time. Many people patronize payday establishments because they need cash immediately, said Eva Wolkowitz, an associate at the Center for Financial Services Innovation, which studies financial products.
Instead, the postal loans (at least as described by the inspector general) would be more akin to installment loans -- another, more obscure type of short-term loan. Unlike a payday loan, installment loans are paid back in several increments, rather than in a lump sum. While there is a wide range of interest rates on installment loans, they generally cost less than payday loans.

Pawnshops and more

Besides installment and payday loans, there are all kinds of alternative credit available, which is another limitation of postal banking. For the most part, postal loans wouldn't offer consumers a real alternative to these other forms of credit.
Wolkowitz and her colleagues have estimated that Americans spent $103 billion on alternative financial services in 2013. Yet only about $15 billion of that amount was spent on the forms of credit comparable to the proposed postal loans. You can see the distribution of these loans in the chart below.

"I don't think the post office would go into the business of operating a pawnshop or loaning out vehicles," Wolkowitz said.
Payments and savings
Much of retail banking has nothing to do with lending, though, and post offices could offer some of those other services.
The Postal Service could take advantage of existing networks established by other post offices abroad to help immigrants wire money cheaply to relatives at home. The agency could offer savings accounts, as it did in the past, along with basic debit cards to help customers manage their money safely and cheaply.
There would be competition, though. The basic debit cards known in the industry as reloadable prepaid cards are quickly becoming popular. Many of them allow customers to cash their paychecks without a fee and offer protection from overdraft charges. The cards are issued by major banks and retailers. Some charge nominal monthly fees. Others, such as the Bluebird card issued by Walmart and American Express, don't.
If any entity can match the Postal Service for bricks and mortar, it's likely Walmart. And Mike Moebs, the founder of the economic research firm Moebs Services in Lake Forest, Ill. asked whether the Postal Service had the technological know-how to administer the cards effectively.
"They're still dealing with paper," he said.

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