Is a Post Office Bank the Answer To Payday Lending?

Out of the frying pan and into the fire for the nation's unbanked and underbanked consumer.

Jul 21, 2014 at 10:00AM


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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