Postal Banking

In most of the developed world today, as well as a fair swath of middle-income and developing countries, you can walk into any government post office and after posting a letter or buying stamps, also deposit money into a savings account that is safe, secure, fully insured, and most of all, free.

“Postal banking” is a phenomenon that most Americans today don’t recognize, but in much of the world, it’s almost the definition of mundane. In the UK, Germany, Japan, South Africa, Korea, India, the Netherlands, China and France, just to name a few, the national postal system also offers basic financial services. Depending on the country, these range from no-frills savings accounts to checking and bill-paying services, to more sophisticated stuff like small loans, money transfer and forms of insurance.

Postal banking is an old idea whose utility for America has returned. We should bring it back, updated for the 21st century. It represents a big solution to two major problems Americans face today: first, and most importantly, low-income communities are seriously “underbanked.” The FDIC finds that over a quarter of Americans either have no access to the banking system or must obtain financial products outside of it (ex. payday loans). Second, the U.S. Postal Service has been teetering on the edge of crisis for years, as legal strictures imposed by Congress starve it of funds and the overall volume of mail decreases. Postal banking would go a long way to restoring its stability.

With large swaths of low-income Americans feeling shut out of the economic growth story happening in much of the country, reviving postal banking should be one part of any progressive agenda to build greater economic resilience and strengthen the social safety net.

Something I didn’t realize until very recently was that the U.S. actually had a postal banking system for over half a century. Proponents finally overcame decades of opposition by the commercial banking lobby in 1911, and the United States Postal Savings System quickly became a popular banking option for low-income and immigrant communities. During its history, the USPSS provided a critical means for alleviating the Great Depression and for selling war bonds during World War II. Soldiers stationed abroad used the system extensively, as did rural communities where banking institutions were much rarer than they are today.

The USPSS was wound down in the mid-60s due to industry pressure that rightly pointed out that the FDIC system made consumer banking more secure and that retail banking locations served rural areas much more extensively than fifty years prior. But it’s hard not to read its demise as strongly influenced by the banking industry’s desire to capture more deposits.

Since then, of course, the American banking system has become significantly unfriendlier to low-income people. Between industry deregulation and increased financial pressure, many major banks have shuttered locations in low-income areas to focus on selling higher-margin financial products to more upscale customers. These “banking deserts” are increasingly served by higher-cost “alternative” financial services forms, most famously the predatory payday lending industry. As usual, John Oliver has the best overview of this industry, which 1 out of 20 Americans – more than 12 million – use. It’s a $9 billion industry. Go to the downtrodden section of any major city, near any military base or to any struggling small town, and you’ll find a large number of these storefront joints charging outrageous rates of interest, which borrowers rarely understand and wind up trapping them in toxic cycles of debt.

Besides payday lending (and its not-much-better cousin, the check-cashing operations), many large consumer banks have become much less interested in providing basic financial services, which makes it much tougher for many underbanked households to obtain plain old checking and savings accounts. Consumer banks have proven remarkably “innovative” in finding new opportunities to tack on fees for previously unremarkable services. Unless you carry a minimum balance and/or have a direct deposit set up, Bank of America now charges $12 a month for a checking account. Industry research suggests that it costs most banks between $200-$300 to provide a retail checking account, and in an era of low interest rates, the industry is less interested in ever in providing those services for free.

(Parenthetically, I personally use an online-only bank. They don’t charge me fees, but I have a direct deposit set up. I also have the means to connect to them with my computer on a reliable internet connection pretty much anytime.)

Much more representative of the state of consumer banking is the ongoing saga we see today at Wells Fargo. In case you hadn’t heard, Wells Fargo was busted by regulators last year for a wide-ranging scandal involving fraudulent accounts and product cross-sells that retail sales personnel opened for customers who hadn’t agreed to them. Just the other day, the results of a review going back to 2009 discovered that 1.4 million more fraudulent accounts had been discovered – almost double what had previously been known. Wells Fargo has fought regulators at every step of the investigation. Although knowledge of the abusive practices is known to have started as early as 2002, and was actively stoked at high levels of the company, there is little chance the review will be expanded that far back.

While Wells Fargo CEO John Stumpf opted for early retirement over the scandal, he took home a package valued at around $130 million. The bank, which last year brought in almost $22 billion in net income, has paid around $7 million to defrauded customers in refunds. Make no mistake: millions of customers were defrauded of far more than $7 million. None of the bank executives who instigated, permitted, overlooked or even encouraged this behavior will suffer any penalty. Warren Buffett (the largest investor in Wells Fargo) is right: the “cockroach rule” would seem to apply here. Where you see a few bad actors like this, dozens or hundreds are likely behind the walls.

I suspect that Wells Fargo is not uniquely awful in the consumer banking industry. They are under the same investor pressures to widen margins, cut costs and increase sales as are any other bank. These pressures systematically lead to worse consumer welfare, particularly for low-income Americans, who pose less of a sales opportunity. There should be a better way.

Take a second and look at this page for the United Kingdom’s postal bank. It’s not exactly fancy, but it’s quite suitable many basic needs. It’s a good demonstration that postal banking is not some radical idea. As I said earlier, in most other countries, it’s quite ordinary.

Postal banking is one of those blindingly obvious, no-brainer solutions that would be a giant boon to millions of Americans (sort of like no-return tax filing). It’s also, frankly, really unlikely to happen. It would require a non-trivial act of Congress that directly challenged the banking lobby and provided a new public service (albeit one that was actually revenue-positive), which, in today’s climate, basically makes it DOA. Almost no one would disagree with this assessment, I think, which is one of the things that makes me less than optimistic about the course of our politics for the foreseeable future.

But at least we can put the right ideas out there. Right?

 

 


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