Commentary on local and national economics, public policy. Related to the web site www.cityeconomist.com. Maintained by John Tepper Marlin.
Thursday, May 31, 2018
DANA CHASIN | Postal Banking's Promise (and Pitfalls)
Postal Savings Certificate from
FDR Days (1941).
Last month, Sen. Kirsten Gillibrand introduced S. 2755, the Postal Banking Act. The bill would establish retail banking services at every U.S. post office and authorize the U.S. Postal Service (USPS) to offer checking and savings accounts, small-dollar loans, debit cards, cash withdrawals and money transfer services in each of its roughly 30,000 offices. – Dana Chasin's Update 275, Guest-Posted by Permission.
In 1910, President William Howard Taft introduced a postal-savings system for new immigrants and the poor that lasted until 1967. The need for postal banking has been revived by several recent events.
The USPS Inspector General (IG) published a report in 2014 in response to the USPS $2.7 billion deficit, describing how the USPS could implement postal banking policies to address the agency's funding crisis. Postal banking could generate $9 billion profit. Sen. Elizabeth Warren has been a long time advocate of postal banking since this IG report and lauded many of the benefits of postal banking. Sen. Bernie Sanders brought postal banking back to the forefront with Sen. Warren during the 2016 primary campaign.
The endorsements by these progressive stars in the Senate led to strong popular support of the idea, but neither Senator introduced legislation. S. 2755 is the first legislative step since 2014.
Benefit 1. Serving lower income and rural communities
Because of a lack of access to high-quality financial institutions, many Americans take out high interest, high-cost alternative forms of credit, costing them nearly $100 billion a year. The average underserved household pays creditors 10 percent ($2,412) of their gross income in fees and interest. Postal banking would allow more than 80 million lower-income Americans without bank accounts to access essential financial tools and be safeguarded from predatory lenders.
The USPS’s 30,000 office locations would house the retail arm of the bank because they are located in every community. These locations exist in banking deserts. 38 percent are in zip codes with zero banks and 21 percent are in zip codes with only one bank branch. Providing access will help Americans generate savings, wealth and credit, while bringing millions of households into the banking system.
President Trump recently gave a speech blaming Amazon for the USPS funding crisis. Nevertheless, Congress is the entity most responsible for the funding crisis facing the USPS. This funding crisis has plagued the USPS since the Bush administration passed the Postal Accountability and Enhancement Act of 2006 (PAEA). The USPS has reported losses every year since 2007, losing $2.7 billion in 2017 alone. This can be attributed to the provision in PAEA that requires the Postal Service to prefund its retirees' health benefits up to 2056. Costing $5 billion per year, this is a requirement that no other entity, private or public, has to make. According to the 2014 IG’s report, postal banking would generate $9 billion in profit annually, effectively eliminating the funding crisis the USPS faces.
Benefit 3. Reducing the Need for Payday Lending
The main focus of S. 2755 is to fight payday lending. S. 2755 would implement smaller short term loans as a public option. 12 million people spend a total of $7 billion a year on short term, smaller loans known as payday loans. These loans average $375 initially with an additional $520 (138%) in fees and interest. Payday lenders have been known to charge interest rates in excess of 300 percent. The USPS has estimated that they could provide the same loan for less than 30 percent in interest rates. S. 2755 would set the interest rates around 10 percent.
Payday lending may be a trickier legislative fix than the first two benefits provided by the bill. There would be underwriting issues that would have to be solved and the interest rate would have to be debated. Implementing small dollar loans into postal banking, however, would decrease predatory payday lending and increase the number of low income Americans who have access to loans they can pay back, improving credit scores.
Benefit 4. Expanding Access to Financial Institutions
S. 2755 would assist millions outside of the banking system who are vulnerable to predatory lenders and other risks, especially those living in rural areas. Many of these people have been denied access to financial institutions simply because of their location.
Although access to financial institutions has not been regarded as a fundamental right in the past, this bill attempts to frame it that way and poses the question: Why haven’t we regarded it that way before? And why isn’t access to financial institutions a fundamental right?
Why the Idea Hasn’t Been Taken up
It should come as no surprise there are opponents to incorporating financial services into USPS operations. The Citizens Against Government Waste has been vocal, publishing a letter arguing the Postal Service should not be trusted to manage money, pointing to it surpassing its statutory debt limit and $120 billion unfunded liability. Anti-government conservatives in the Republican Party are unlikely to warm up to an idea like S. 2755 anytime soon. The bill is something to watch if the Democrats continue to regain power as the midterm elections proceed..