James Militzer

Weekly Roundup, 11/22/14 – Going Postal: Is postal banking a key to financial inclusion?

Quick, when was the last time you wrote someone a letter?

For me (and probably many of you) it was around Christmas of 2013. Now that the holidays are approaching, I’ll probably set aside my email and texts to send out at least one more. At this point, I don’t even send any bills through the mail – e-payments are so much easier.

And that’s a big part of the reason the U.S. Postal Service (USPS) recently announced a $5 billion-plus loss for the 2014 fiscal year – its most profitable product, first-class mail, is in long-term decline as people have turned to electronic communication. (Its need to cover its retirees’ health care costs is also a major factor.)

The Postal Service’s fiscal problems aren’t new, and oddly enough, neither is one of the more interesting proposals to fix it: postal banking.

Unbeknownst to many, the USPS operated a successful postal savings bank from 1911 to 1966. As banking law professor Mehrsa Baradaran put it, the postal bank “was in fact so central to our banking system that it was almost the alternative to federal deposit insurance, and served as such from 1911 until 1933. The system prevented many bank runs during a turbulent time in the nation’s banking history—essentially performing central banking functions before the Federal Reserve was up to the task.”

Besides providing much-needed revenue for the USPS, a postal bank could also help solve one of the central problems in serving low-income Americans’ financial needs: the lack of accessible bank branches offering relevant, affordable products. Since the 2008 financial crisis, a wave of branch closures has made banks an increasingly endangered species in lower-income markets and small rural areas. The lack of banks in the area, among other factors, has pushed many of these customers toward often more costly check cashers and payday lenders. With post offices in every ZIP code, the postal service could immediately remedy this problem, becoming the widest-reaching bank in the country. It’s broadly trusted by customers, has an existing cash handling system, and could be structured to offer financial services that range from prepaid debit cards and check cashing to savings accounts and even small-dollar loans.

The benefits are clear enough that many countries in both the developed and developing worlds already offer some form of postal banking. So it’s no surprise that in recent weeks, both India and the United States have moved closer to adopting postal banking services. The implications are pinging around the financial inclusion chattering class, an area we try to monitor on NextBillion Financial Innovation.

On first blush, I couldn’t see why anyone concerned about financial exclusion would oppose the idea. Sure, banks and alternative financial providers would hate it, but if they were currently offering better products to the poor, they’d have more of a right to complain. But then I read a mini blog spat between two unlikely (though genial) combatants: Dean Baker at the Center for Economic and Policy Research and Kevin Drum at Mother Jones, both of whom are left-leaning.

In response to Baker’s endorsement of postal banking, Drum wrote:

“Color me skeptical. I know this sounds like a terrific, populist idea, but I can think of several reasons to be very cautious about expansive claims that the USPS is uniquely situated to provide basic banking services. …

When you say ’postal banking,’ most people think about small mom-and-pop savings accounts. But that’s not really what the postal service has in mind. The [Inspector General] report focuses more on (1) payment mechanisms (i.e., electronic money orders), (2) products to encourage savings, and (3) reloadable prepaid cards. The first is fine, but not really ’postal banking.’ The second is problematic since even the IG concedes that the reason poor people tend not to save is ’largely due to a lack of disposable income among the underserved.’ … That leaves prepaid cards—and maybe a good, basic prepaid card sponsored by the federal government is a worthwhile idea. But that’s really all we have here.

Finally, there’s the prospect of providing very small loans. But as much as we all loathe payday lenders, there’s a reason they charge such high rates: they also have high rates of default. The postal service can charge less only by (a) losing money or (b) providing loans only to relatively good customers. If you read the IG report, they basically recommend the latter. It’s not clear to me that this is truly an underserved niche.”

“Yes, other countries have postal banking services,” Drum concluded. “But these were mostly established long ago, before commercial banking became ubiquitous. It may have been a good idea half a century ago, but that doesn’t mean it’s a good idea now.”

Baker shot back:

“The revenues from payment mechanisms and reloadable prepaid cards run into the tens of billions of dollars a year. Much of this comes directly from the government, which now uses a substantial portion of the budget for food stamps and other government transfer programs to pay banks to provide beneficiaries with cards. The Postal Service could almost certainly do this at a lower cost.

More importantly, many low and moderate income people get ripped off by paying exorbitant fees to check cashing services and other intermediaries to get access to their money or to send it to a third party. While the fact that these people may save large amounts of money by using a postal bank, which they might use because they trust the post office, draws a ’meh’ from Kevin, that sounds like a pretty good thing to me. Imagine paying 50 cents or a dollar to have your $200 paycheck cashed instead of the ten dollars that a check cashing service might charge.

Kevin’s right that the biggest obstacle to savings for low- and moderate-income people is a lack of money. But the fact is that when they do save, they often pay excessive fees to intermediaries. … That doesn’t mean that everyone would say the Postal Service should be the venue for this savings, but there seems no reason to rule it out apriori as a candidate.”

As for small-scale lending, Baker argued, “Suppose that a worker has direct deposit of their paycheck every week at an account with the post office. The risk to the post office that this paycheck won’t come in as expected is small. … This means that the interest rate can be adjusted downward accordingly. The person who is of questionable credit quality to the payday lender would be a relatively low-risk customer to the post office in this case.

“The basic story with providing financial services to low and moderate income people is that it is a low margin operation,” he continued. … “The financial industry has discovered that the potential for profit is much greater by charging fees and penalties to these customers and in a market economy; we expect businesses to do what is most profitable. … Why not just give people an alternative?”

Should postal banking be that alternative? Can the experience of developing countries point toward any benefits or risks? Feel free to leave your views in comments.

In Case You Missed It … This Week on NextBillion

Twitter Top Ten – 11/16/14: Our favorite tweets of the week

NexThought Monday – Mobile Money Interoperability is Not a Silver Bullet for Financial Inclusion

The India Sterilization Tragedy: Highlighting the need for better choices, safer procedures

Gates Goes in on Impact Investing: What the philanthropist’s investment in Unitus Seed Fund could mean for BoP investors

Rational Exuberance: The momentum in impact investing is real – but so is the need for clarity about the changes (and challenges) underway

A Solution is Born: Student’s inflatable incubator design wins James Dyson Award, offers answers for developing world

Blurring the Boundaries: How impact investing is shifting paradigms in the public, philanthropic and nonprofit sectors

Moving the Sanitation Needle: On World Toilet Day, it’s time to talk about some creative, unlikely collaborations

You Probably Don’t Know Your Customers: Harnessing mobile to connect for product development

Curbing the “Impact Impostors”: The growing movement toward transparency in impact investing

Learning from What Works: IFC’s new report on inclusive business includes lessons for each phase of the value chain

At Echoing Green’s Inaugural Global Conference in Mumbai: With 400 million without electricity, you can’t talk in small numbers here

financial inclusion, public policy