In a world seemingly dominated by shiny startups and flashier brands, the United States Postal Service may seem like a dusty institution. But what if your local post office could do much more than sell you stamps?
From low-interest loans to fee-free bank accounts, “postal banking” could be the answer to providing low-cost financial services to those who need them most, especially in an economy ravaged by the coronavirus pandemic.
Here’s a look at the potential benefits of postal banking and why some experts say we haven’t brought it back.
What Is Postal Banking?
Postal banking previously existed in the U.S. with notable success. Known as “poor man’s banks,” post offices offered a number of financial services between 1911 and 1966, including savings accounts with modest interest rates. Postal banking was particularly popular during the Great Depression, when many commercial banks failed. Eventually, the system was quietly killed.
President Lyndon B. Johnson “ended the postal banking system at the behest of the bankers because they argued that it was unnecessary,” said Mehrsa Baradaran, an associate dean at the University of Georgia School of Law and author of “How the Other Half Banks” and “The Color of Money: Black Banks and the Racial Wealth Gap.”
Up until the late 1960s, the banking sector was much different than it is today, Baradaran noted ― banks were heavily regulated and only allowed to have one or two branches. They were also allowed to offer interest rates up to 3%. “The postal bank was offering less,” she said. “Most communities had access to a bank, a credit union or a thrift, so deposit accounts at the post office were redundant for some communities.”
Still, many other neighborhoods were reliant on the postal banking system and remain underserved today.
“Today, banks have merged and conglomerated and many communities have lost their bank,” Baradaran said.
The Postal Service still offers some limited banking services today, such as issuing money orders and cashing Treasury checks, but it’s a far cry from what used to exist. The closing of bank branches in certain areas has, in part, allowed predatory financial companies, such as payday lenders, to gain a foothold in and zap wealth from underbanked communities.
Meanwhile, postal banking remains alive and well in many nations, including Italy, Switzerland and Australia.
“The combination of postal and banking services makes a lot of sense, particularly in the economic evolution of those countries because of their affinity for government-provided services, and the traditionally high cost of private-sector banking,” said Vinay Prabhakar, vice president of product marketing for Volante Technologies, a global financial technology company.
As November’s presidential election looms, more attention is being focused on postal banking and how it could help our economy. Former Democratic White House contenders Sens. Kirsten Gillibrand (N.Y.), Bernie Sanders (Vt.) and Elizabeth Warren (Mass.) each made postal banking a key component of their campaign platforms, for example.
Baradaran has been a longtime proponent of postal banking as the answer to reversing inequality within the banking industry. Recently, she authored a report for the Justice Collaborative Institute that examines how postal banking could be especially beneficial in light of the coronavirus. She writes that there are three key improvements to our current banking system that postal banking could accomplish:
“Provide consumer financial services to underbanked communities, and help vulnerable populations achieve financial security and build savings;
Create a public option to compete with private banks; and
Strengthen the USPS, a vital part of our nation’s infrastructure.”
1. Access For The Unbanked
For most people, banking is as integral to daily life as shopping at the grocery store and visiting the dentist. Yet 8 million U.S. households, made up of 14.1 million adults and 6.4 million children, did not have a checking or savings account as of 2017, according to the FDIC.
Known as the “unbanked,” these individuals lack access to safe, secure and affordable banking services and instead rely on fringe financial services such as check cashing, payday loans, pawn shop loans and tax refund advances. Another 24.2 million households were considered “underbanked” in 2017, meaning they had a bank account but also obtained financial products or services outside of the banking system.
People of color are more likely to be unbanked: About 4% of white households do not have bank accounts, while 20% of Hispanic households and 21% Black households are unbanked.
Being unbanked or underbanked is expensive, hampering a person’s ability to save money and become financially secure. The average payday loan borrower, for instance, spends over $500 a year in interest. A worker who earns $22,000 a year and doesn’t have a bank account spends $800 to $900 a year in check-cashing fees alone, according to research cited by PBS.
The coronavirus has only compounded these issues. For example, individuals with bank accounts on file with the Internal Revenue Service received their stimulus checks within weeks, while those in line for paper checks had to wait much longer (with many still waiting). And again, it’s communities of color ― particularly Black communities ― that are disproportionately impacted by the physical and financial devastation of the pandemic.
Prabhakar said that postal banking would provide low-cost and accessible banking services to the most underserved and underprivileged segments of U.S. society, which also happen to be those most affected by the current pandemic and its associated financial impacts. “The core offerings would remain paper- and cash-based, but this would be well-suited to demographics with limited technology access and reliance on cash,” he said.
2. Competition For Private Banks
Originally, post offices were meant to complement, rather than compete with, private banks. However, with the loss of low-cost postal banking services and continued deregulation of the banking industry, major financial institutions could use some competition.
Even though banks receive billions of dollars in federal funding each year, they are private businesses with no incentive or requirement to serve the best interests of customers. Bank fees have steadily increased over the years, pushing away low-income (i.e. low-profit) customers. In fact, at some large regional banks, fees account for nearly 40% of revenue.
Banks have also been closing down branches in areas that aren’t profitable, particularly rural and impoverished communities, creating banking deserts. “The banking sector has a long history of excluding communities of color and avoiding opening branches in zip codes where Black residents predominate,” Baradaran said.
Postal banks, on the other hand, have the opposite history. Even before the Great Depression, postal banking customers were predominantly in segregated northern cities. “The postal banks attracted both recent immigrants and Black residents,” she said. “Today, the post office still serves every community regardless of costs.”
There’s a post office for every ZIP code in the country, and 59% of post offices exist in ZIP codes with zero or one bank branch.
Baradaran’s report also noted that distrust of financial institutions is the second-most common reason some households lack bank accounts. (The fact that the coronavirus pandemic only made big banks even bigger underscores reasons for that distrust.) In contrast, a survey by global intelligence company Morning Consult found that the USPS is the most trusted brand in the country.
3. Help For A Dying USPS
The postal service was already struggling prior to the pandemic. Over the past 11 years, it’s lost $69 billion. The rise of email, of course, has cut into first-class mail usage. Plus, in 2006, Congress required the agency to fund retiree health benefits 75 years in advance, a plan which required an extra $5.6 billion payment per year for 10 years (USPS defaulted on the payments in 2012). Now, thanks to the extra pressures from the coronavirus, the USPS may run out of cash by September without financial assistance from the government.
“We anticipate that our business will suffer potentially dire consequences for the remainder of the year,” Postmaster General and CEO Megan J. Brennan said in an early May press release. “At a time when America needs the Postal Service more than ever, the pandemic is starting to have a significant effect on our business with mail volumes plummeting as a result of the pandemic.”
In response, President Donald Trump called the Postal Service “a joke” and said he would not authorize additional funding unless it raised its prices on packages.
Postal banking could help offset some of the losses. The Postal Service estimates that offering banking services could add $8 billion to $10 billion in revenue a year. And it’s an institution worth saving, Baradaran stressed.
“The USPS is the very embodiment of the best of our democracy and I think it is the most underappreciated organization in America,” she said.
So Why Haven’t We Reinstituted Postal Banking In The U.S.?
Prabhakar said the reason postal banking hasn’t made a comeback in the U.S. is largely cultural.
“We have a deep-seated distrust of government organizations taking on functions which we may feel are best served by private enterprises,” he said.
Financial services provided by the Postal Service at a reasonable cost would potentially take business away from the private sector.
Barandaran noted, “We are captivated by a myth that private markets can work better than public services. They do work better ― for the wealthy.”
Prabhakar added that any expansion of services would require an increase in the USPS budget, which many political figures oppose even if these expenditures could be balanced by increased revenue in the long run.
Not surprisingly, financial institutions have been some of the biggest critics of postal banking. They argue that we shouldn’t hand over the responsibility of providing financial services to a federal organization that operates at a massive deficit each year, especially considering that postal banks would end up filling the gap for communities with higher default rates.
But Baradaran said that compared to the current system, postal banking would be a win-win.
“Of course we’d have to make sure it was run well, but the post office is not an organization that is primarily driven by profits,” she said. “As long as it remains so, it will provide much less predatory services to the communities it serves than the current payday lenders, check cashers and alternative service providers.”