The Case Against Postal Banking

Dean Baker thinks the Washington Post is wrong to imply that the postal service hasn’t been aggressive about improving its productivity. Agreed. Then this:

The other point is that the Postal Service could improve its finances by expanding rather than contracting. Specifically, it can return to providing basic banking services, as it did in the past and many other postal systems still do. This course has been suggested by the Postal Service’s Inspector General.

This route takes advantage of the fact that the Postal Service has buildings in nearly every neighborhood in the country. These offices can be used to provide basic services to a large unbanked population that often can’t afford fees associated with low balance accounts. As a result they often end up paying exorbitant fees to check cashing services, pay day lenders and other non-bank providers of financial services.

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. Here are a few:

  • What’s the core competency that would allow USPS to excel at banking? The Inspector General says that “the first and possibly most important factor is the sheer ubiquity of the Postal Service.” In other words, they have lots of locations: 35,000 to be exact. But who cares? Physical real estate is the least compelling reason imaginable to think an organization would be great at basic banking. After all, you know who else has lots of branches? Banks. Even after years of downsizing, there are nearly 100,000 branch banks in the United States.
  • What else? The Inspector General suggests “trust and familiarity with the postal ‘brand.'” Meh. Americans trust McDonald’s too. That doesn’t mean they’d flock to do their banking there. This kind of thing reminds me of hundreds of really bad marketing presentations I’ve attended in my lifetime.
  • 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 IG 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’s quite an understatement, and it’s not clear what unique incentives the postal service can offer to encourage savings among people who have no money to save. 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. 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.

If the government wants to provide basic banking services for the poor, it’s not clear to me why USPS should do it. They have literally no special competence at this, and the motivation behind it is to provide a revenue stream that offsets losses from mail services. That’s just dumb. Why on earth should public banking services subsidize public mail services? They have nothing to do with each other.

If we really want some kind of government-sponsored basic banking service, we should simply create one and partner with commercial banks to offer it. If this is truly profitable, banks will bid to host these accounts. If it’s not, the subsidies will show up directly in the annual budget accounts. That’s the way it should be.

I’m not yet convinced that this is a good idea to begin with, but I could be persuaded. However, if it is a good idea, there’s honestly no reason to get the postal service involved in this. We already have a Treasury Department, and we already have a commercial banking industry. They truly do have core competencies in offering financial services. Why not use them instead?