Banks have been consistently uninterested in providing financial services to poorer Americans, but others are increasingly jumping at the chance to do so. The latest is the United States Postal Service (pdf), whose inspector general published a paper last week detailing how serving the so-called unbanked with savings accounts and small-scale loans could provide a valuable public service while shoring up the finances of the vulnerable agency.
The Post Office’s proposal follows T-Mobile’s plan to offer some financial services to its customers, and Wal-Mart Stores has been offering similar services for several years, along with a few other companies whose main businesses are retail goods and services. These companies are stepping into the vacuum created as traditional financial institutions withdraw from serving unprofitable low-income areas. Banks closed almost 2,300 branches in 2012, and 93 percent of the closings since 2008 occurred in Zip Codes where the median income is below the national average. Payday lenders, pawn shops, and other exploitative businesses have been happy to step in, but the high costs of their services leave them open to competition, and the increasing interest of regulators leaves them vulnerable.
As a banker to the unbanked, the Post Office comes with both distinct advantages and drawbacks. The overhead costs are largely taken care of, because Post Offices already have the real estate. USPS says it has 35,000 offices, branches, and other locations across the country, and almost 60 percent of post offices are in Zip Codes that have one or zero bank branches.
The idea of turning the mail system into a bank has been discussed previously, and the Post Service has run a bank of sorts in the past. Beginning in 1911 and lasting several decades, as many as 4 million people—many of them immigrants—kept postal savings accounts with the agency. But the public gradually lost interest, and the USPS shut down the service in 1967. Post offices operate financial services in other developed countries and make almost 15 percent of their revenue doing so, according to the Postal Service report. A similar proportion of revenue from banking would mean the USPS would have to bring in $9.5 billion.
The Post Office claims it can get almost there. Financially underserved Americans spent $89 billion in financial fees in 2012, so the Postal Service says it could make $8.9 billion just by capturing 10 percent of that sum. But that number is somewhat problematic: Post Offices would have to charge lower fees than the standards in an industry that is pretty universally seen as scammy, so it would have to capture a much bigger chunk of the market to make nearly $9 billion. The twin philosophies of profit motive and public service could end up being awkward, argued Adam Levitin, a professor of law at Georgetown, in an essay in American Banker. “To the extent that a postal banking system is designed to provide low-cost services to consumers, it is potentially at odds with the USPS’s need to find new revenue sources,” he wrote. “Put another way, is the mission of a postal bank profit or financial inclusion?”
The politics of having the Post Office serve as a banker would also be tricky. A 2006 law forbids the Postal Service from getting into any nonpostal businesses, and Congress in its current form is unlikely to grant special permission. The agency thinks it wouldn’t have to get congressional approval, though, since it could describe any new financial services simply as an expansion of its current money-order business. It will likely have some political backing if it actually tries this. U.S. Senator Elizabeth Warren, a Democrat from Massachusetts, said she was intrigued by the idea in an essay this weekend in the Huffington Post:
“The Postal Service is huge—employing more than a half million people—and its history is long and complicated. Any change will take time. But this is an issue I am going to spend a lot of time working on—and I hope my colleagues join me.”
Trade groups for banks have said they’re against the idea, likening it to the banking industry deciding to open up their own airlines. But it seems increasingly clear that the emerging bankers for the poor will not be banks. “I perceive banks as becoming increasingly good at commercial banking and increasingly bad at retail banking,” says Arjan Schutte of Core Innovation Capital, an investor in financial technology companies. “Just from an economic perspective, there are better places than banks.”
Many of the Postal Service’s advantages in this market are shared by private-sector companies whose pockets may be deeper and whose politics are certainly simpler. The important question isn’t whether it can be better than banks have been—it’s whether it will be better than these new competitors.