Is a Post Office Bank the Answer To Payday Lending?

Source: Wikimedia Commons

A few years ago the government snuffed out the possibility of profit-making businesses like Wal-Mart (NYSE: WMT  ) and Home Depot  (NYSE: HD  )  offering financial services to tens of millions of unbanked and underbanked consumers. But now it thinks the loss-generating United States Postal Service ought to be able to run a bank.

Following up on the Postmaster General's report earlier this year recommending the Postal Service offer financial services to consumers ostensibly without access to affordable, mainstream financial products, The Pew Charitable Trusts held a conference the other day featuring politicians and think on ways to advance that goal. Somehow an institution that can't profitably deliver the mail will do a better job handling people's money.

As part of the Dodd-Frank overhaul of the nation's financial system, a three-year moratorium was imposed on nonfinancial businesses offering credit, savings, and CDs to consumers. Prior to that, retailers including Target (NYSE: TGT  ) could apply for bank charters by creating industrial loan corporations, or ILCs, to establish low-cost financial-services arms. 

In fact, numerous nonfinancial companies like General Electric, General Motors --  actually, much of the auto industry -- and others operated as banks through ILCs without any industry outcry. It was really only Wal-Mart's planned entrance into the business that causes them to tremble with outrage.

Although payday lenders and such are not the best solution to someone's long-term financial needs, they have provided a necessary service traditional banking institutions either could not or would not offer. According to Sen. Elizabeth Warren, who presented at the Pew conference, 28%, or 68 million Americans, rely upon nonbank financial services.

Yet payday lenders, check cashers, and pawn brokers are also derided as loan sharks primarily engaged in predatory lending practices on the poor and unaware. These businesses have been subjected to an ever-increasing litany of regulations that's slowly starving them out of existence.

Despite this development, the situation isn't improving because banks are closing branches in rural areas, as well as in low- and medium-income families. Banks blame new regulations on their own business for the withdrawal from those locations, saying the ability to gouge their customers with fees for overdrafts, credit card transactions, and mortgage lending dints its ability to reach those areas.

The solution, as some in the government see it, is to allow post offices to provide those banking services. Their branches are already there, and the Postmaster says if just 10% of the underserved bank with the postal bank giving it the money they currently spent on fees and interest with payday lenders, it would generate almost $9 billion a year in new revenue.

That would certainly help plug the $5 billion hole the Postal Service lost during its last fiscal year, though it doesn't take into account the additional expenses that would be imposed. And as Rep. Darrell Issa noted at the Pew conference, a post office isn't set up to handle confidential banking transactions and its employees aren't educated or trained for handling financial transactions. It's not as simple as putting your letter carrier behind the teller window.

What would really help the unbanked with their financial needs would be allowing retailers to offer financial services just as they wanted to. Wal-Mart, in particular, already caters to the target demographic the Postal Service would be pursuing as its average customer is already in the low- and middle-income bracket, while its stores have spread across rural communities like kudzu. It continues to expand to further reach potential customers, and is looking to offer smaller format local shops as a means of achieving growth.

And it already offers an entire suite of financial services as it is, including allowing shoppers to pay their car, phone, cable, and electric bills for a small fee; get money orders and wire money globally; cash payroll and government checks; get prepaid debit cards; print personal and business checks; and invest through ShareBuilder. 

Rather than the pariah it was made out to be, Wal-Mart was actually the salvation the unbanked and underbanked needed. And it could all be achieved without a single penny of taxpayer money being spent. 

A Postal Service bank is simply a means of trying to preserve an ailing and failing institution, but one which offers no guarantee that it's bloated bureaucracy would be able to effectively offer financial services without digging an even deeper hole for itself, and possibly taxpayers. Better to trust in Wal-Mart, Home Depot, and other private -- and profitable -- businesses to meet the needs of the consumer than to try and recreate a government agency into something it's not.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 21, 2014, at 12:36 PM, DrP79 wrote:

    What could possibly go wrong with a bankrupt partisan union led government lending organization?

  • Report this Comment On July 22, 2014, at 9:38 AM, grannybunny wrote:

    Please do some research. It was the Postal Service's Inspector General -- not the Postmaster General -- who made the suggestion that USPS resume Postal banking, which it provided until 1967, quite well. Also, the Postal Service is able to deliver mail without incurring financial losses. Operationally, it is profitable. 80% of its losses and 100% of its debt are directly attributable to a 2006 Congressional mandate to prefund 75 years' worth of future retiree health benefits within 10 years, a draconian requirement to which no other entity -- public or private -- has ever been subject. This prefunding has taken USPS from being debt-free and profitable to the very brink of bankruptcy. And the resulting $50+ billion slush fund has been used for non-Postal purposes, bailing out the taxpayers and the Treasury. The Postal Service is not supported by taxpayer funds, and has not been for decades. And do you honestly believe that Wal*Mart employees are more highly-qualified than Postal Workers? Give us all a break!

  • Report this Comment On July 22, 2014, at 2:15 PM, TMFCop wrote:

    grannybunny,

    As I've noted before, it's a misnomer the USPS has to "prefund 75 years of benefits." That's simply not true. The General Accounting Office specifically says the reforms enacted "did not require USPS to prefund 75 years of retiree health benefits over a 10-year period."

    It does require the USPS to prefund current employee and dependent benefits, but the "75 years worth" is misrepresented because some employees will live to 75 years of age, others will not, so there is a balance.

    http://www.gao.gov/assets/670/661637.pdf (p. 10, footnote 16)

    Unfunded pension liabilities in corporations is a huge ticking time bomb for them as well. Congress has merely tried to head off the bomb exploding with the USPS.

    As for Wal-Mart employees working in financial services, they would be trained for that purpose. The argument for the Post Office running a bank is being made asif all it would take would be to open a branch there because they already have offices in place, but it's a far more complicated process than that. But in all, I'd trust private enterprise over a government-sanctioned monopoly.

    Rich

  • Report this Comment On July 25, 2014, at 9:47 AM, grannybunny wrote:

    Well, Rich, you're technically correct that the PAEA did not require 75 years' of prefunding, it required that future retiree health benefits be "completely" funded within 10 years, however many years of benefits that required. A current employee could be 18 years old, and could live to 100, which would be 82 years. And he could -- at the time of his retirement -- be married to a substantially-younger person, who could also be entitled to health benefits, so, obviously, 75 years is just an estimate. Unfunded pension liabilities aren't really a concern for USPS. Due to errors in the statutory formulas setting the payment amounts, the Postal Service has been forced to hideously overfund both its retirement programs: CSRS by $50-75 billion (estimates vary) and FERS by approximately $10 billion. There is no "bomb exploding" with the USPS. Postal employees working in financial services would also be trained for that purpose, just like the minimum-wage Wal*Mart ones. USPS already operated a bank, until 1967, and knows how to do it. The problem with your trust in private enterprise is that the private sector has wholly-failed to serve the lower end of the financial spectrum, and the unbanked and underbanked are increasing in our society and are forced to deal with predatory lenders that only worsen their economic situation. Having the most trusted governmental entity provide trustworthy banking services to the unserved, at non-predatory rates -- while also capturing a profit -- is a win-win for everyone, including society at large.

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