What about a Post Office Bank?

So over the past couple days we’ve been getting ourselves in a tizzy about the Bernie Sanders/Alexandria Ocasio-Cortez proposal for a cap on interest rates of 15%, which is intended to be paired with the (re)introduction of a “post office bank” which will, in addition to other hoped-for benefits, also lend at lower rates than traditional credit cards and fill in gaps in the market if they cease lending with these limits.  (The bill’s draft text, is limited only to the 15% interest cap but the “white paper” – a medium blog post – suggest that the post office would provide checking accounts and low interest loans.)

Now, however tempting it is to decry this as an outrage (“I already stand in long enough lines already, and AOC and Sanders want to make the post office lines even longer!” or “those employees are incompetent enough already and you want them to be bank tellers, too!” or “if you get the government into the retail banking business, next thing you know, they’ll be demanding government subsidies or loan forgiveness for people defaulting on their Post Office loans”) it is already the case that the Post Office is a hybrid sort of critter, with a  monopoly on first-class mail delivery to ensure that residents of rural areas receive the same service at the same price as city folk, while trying to compete on package delivery with UPS and FedEx, and all with prices and suchlike fixed by Congress.

And that makes it at least something to consider with an open mind, whether this mandate to deliver mail while not necessarily turning a profit, but in the most cost-effective manner possible, covers whatever ancillary services can make productive use of the postal service’s existing network of facilities so as to benefit from the overhead costs already there due to the provision of mail services.  If, for instance, the lines at the post office are due to small numbers of windows being open (presumably because the employees are hired on a full-time basis and if they hired to accommodate the rush hour periods at lunch and late afternoon, they’d have workers sitting around at other times?), but if having more customers simply meant opening up another window, it could be a win.

Luckily, there are two documents put together by the Post Office’s Office of Inspector General that assess the feasibility with an eye toward addressing whether there were services that could feasibly provided, not as a “welfare benefit” for the poor but as a reasonable business model:  “Providing Non-Bank Financial Services for the Underserved” from January of 2014 and “The Road Ahead for Postal Financial Services,” from May of 2015.  (There may be others, but this is what I am aware of.)

So here’s a quick read of these two proposals because I think it matters to understand this as context — and to remember, again, that the Post Office is already a hybrid governmental body/service provider.

To begin with, they start with the question of the “un-” and “under-banked” — the former being those who have no bank account and the latter being those who have used some sort of “non-bank financial service” such as check cashing, money orders, or payday loans.  Now, I question some of this anxiety about “the underserved” since, as profiled in the 2017 book, The Unbanking of America, many users of these services do so because they provide certain advantages over traditional banks, and, at any rate, some of those classified as “unbanked” — reported to be 8% in the 2014 report — may be using prepaid debit cards which function in a meaningful way as substitute bank accounts.  But nonetheless the author, Lisa Servon, explains that if your credit rating is poor enough, not only will most banks charge you fees, but they may not even allow you a checking account in the first place (or charge higher fees – see my other old blog post), to avoid the hassle of continued overdrafts, however much they might charge in fees.

In any event, the 2014 report provides 4 guiding principles:  a proposed new product must fulfill an unmet market need, must be consistent with the Postal Service’s competencies and assets, must fulfill an important public purpose, and must cover its costs at full maturity.

It observes that the Post Office already has a 70% market share in the US domestic paper money order market, and also sells international money orders, though both these services are paper-based and the future of this product is electronic.  Local Post Offices also sell prepaid debit cards from American Express (as well as various gift cards from retailers, along side their greeting cards).  It would also be a significant revenue opportunity, although this would not be in competition with traditional banks but via partnerships with them.

Because 2006 legislation “prohibits the Postal Service from offering new nonpostal services” (p. 9) the report differentiates between services that would build on existing services and not need new authorization, and those which would be wholly new.  Among these:

  • A “Postal Card” — a reloadable prepaid card.  This appears to be similar to what already exists on the market, except with the convenience (for folks in underserved geographic areas) of being able to conduct transactions such as reloading, withdrawing cash, paying bills, or cashing checks, etc.  This would “likely [be] in partnership with banks” but would offer consumers “a more transparent, affordable option that is tied to a ubiquitous physical distribution network of Post Offices” (p. 11).  This doesn’t sound unreasonable as long as this is done in an unsubsidized manner.
  •  An “interest feature” on the Postal Card to encourage savings.  This sounds great in principle but a bit more questionable in practice, given how low actual interest rates are even at “real” banks.
  • Small loans:  these would be available only to those using a Postal Card and who have a paycheck (or Social Security or other recurring benefit) loaded onto their card; they would borrow up to 50% of their paycheck, and then 5% of their pay would be autodeducted until the loan is paid off.  Note, however, that in their hypothetical example, they would still charge $25 upfront and a 25% interest rate, which is higher than Bernie and AOC’s 15% cap though lower than a payday loan. In addition to the requirement for payroll deduction loan repayment, the Postal Card could be enabled to snag the tax refund of customers who default by removing the direct deposit (or losing their jobs).  (Note that there are a number of companies which low-wage employers use to provide paychecks on prepaid cards already, and presumably they could offer the same service, though I’ve never heard of it and presumably they can’t do it as easily without the pairing with retail locations.) Again, the Post Office might do this in partnership with banks or other financial institutions, not by being a bank itself.

So this doesn’t really sound that outlandish to me — but at the same time, nothing in this proposal is a replacement product for consumers who want to put their new TV on a credit card and pay it off over time; it’s very focused on a very small segment of the market.

At any rate, the follow-up 2015 paper tries to look at the issue with an eye more toward real-world implementation, rather than the focus on rationale of the first paper.  The paper begins by identifying “strategic advantages,” among these, that low-income prospective users viewed the Post Office (both as an institution and as a local office) favorably and were receptive to the idea and that postal clerks everyday work in their usual transactions would be easily transferable to new processes they would need to learn, with automated systems and partners handling more complex work (e.g., helping a consumer apply for a loan would be comparable to helping a consumer submit a passport application).

The 2015 report also addresses the question of which services the Post Office might need additional authorization to provide, rather than merely being an extension of existing sales of prepaid cards and money orders.  For instance, they might already be allowed to provide extended check cashing services but probably couldn’t provide direct deposit of checks into an account tied to a prepaid card; they could provide bill payment only “if determined to be ancillary to sending hardcopy bill payments through the mail.”

In addition, the report assesses financial feasibility of a range of actions from simply providing floorspace for sale of products to a full-blown Post Bank, and concludes that the full-blown Post Bank is “less viable than other approaches.”

So let’s compare this to the oft-touted “public option” for healthcare, in which proponents call for the government to, put charitably, run a nonprofit health insurance agency in which the government’s lack of profit motive and large customer base enables it to offer lower prices.  Why do I cringe at a “Medicare buy-in”?   First of all, because I assume that the government would dictate prices to providers in an unsustainable manner and do more harm than good, and, secondly, because it appears rather likely that the structure of any such program would, even so, be rather indifferent to the actual costs of the program and involve considerable government subsidies.

But if the Postal Service, which is already a hybrid agency, can make a true business case for expanding services in a way that neither requires government subsidies nor meddling with price controls, I’m good with evaluating it on its merits.

And, finally, none of this has anything to do with the Sanders/AOC proposal with its suggestions of checking accounts and “low interest loans.”

Image: https://pixabay.com/photos/mail-truck-mail-clerk-mailman-3248139/