Last week, the U.S. Postal Service Inspector General released a report that has created quite a bit of buzz. It highlighted the challenges that the 68 million Americans who are outside of the mainstream banking system face, and the tremendous revenue-generating opportunity this vastly underserved market creates for the Postal Service. Sen. Elizabeth Warren (D-MA) penned an op-ed promising to promote the idea in Congress. David Dayen of the New Republic supports the idea and called on President Obama to explore implementing this policy to fight income inequality.
As I read the report, I too found it both disturbing (sky-high fees for hard-working people to access their own money) and exciting (tremendous opportunity for the market demand to be met). But, in a very personal way the report hit me hard. From my experiences working for a non-profit organization in Haiti, I had seen this problem before, but I had never fully understood the magnitude of this economic challenge here at home.
Fighting for your money
Driving through Haiti – whether through the congested streets of Port-au-Prince or the soaring mountains of Cap Haitien – you see many things. You might look out the window and see local women setting up their streetside marketplaces to sell fruits and vegetables, or men working to repair a flat tire for a broken down bus called a "tap-tap." You would see people selling cell phone minutes, food, or disposable bags of water.
What you would likely not see is a bank.
As in most emerging markets, Haiti's lack of accessible and affordable banking services creates tremendous challenges for its people. It makes it a harder place to do business and access one's own capital – forget accessing affordable financing to grow or expand one's business. It forces many to live outside of the standard banking system, resulting in people holding a substantial amount of their total net worth in cash – increasing the potential for devastating loss and decreasing the likelihood of substantial savings.
The lack of accessible and affordable banking services was not just an inconvenience for the Haitian employees I worked with; it was a real, costly challenge. It was yet another barrier on the pathway to economic self-advancement. While there have been some innovative mobile money solutions to combat this challenge, for many, paying high fees to send money from one town to another or spending an entire day trying to cash a check is simply a way of life.
While the American banking system is far more sophisticated than an emerging market, the vast scope of Americans who are outside of or underserved by the mainstream financial system is truly stunning. A quarter of American households do not have bank accounts. In 2012, this subset of Americans spent nearly $89 billion on interest and fees – to access their own money.
For an average underserved family, that means they spent $2,412 for basic banking services that the other three-quarters of the country receives with far greater ease and at a far cheaper price. These unnecessary costs can mean the world to a struggling family. In 2012, the average gap between a person filing for bankruptcy or staying afloat was only $26 per month.
The data released in the report makes clear that this is a major economic challenge for the nation, but also a ripe opportunity for an entity to meet this demand.
How helping the poor could help save the Postal Service
The report makes the case that the Postal Service is uniquely positioned to meet the demand of America's financially underserved communities. The nationwide reach of the Postal Service logistical network – over 35,000 locations – in big cities, small towns, and everything in between is unmatched. Plus, nearly 40% of USPS internally managed locations are in zip codes without a single bank. Another 21% of their locations are in zip codes with only one bank.
Without access to basic, affordable, financial services, some of America's most economically vulnerable citizens pay severe and unfair penalties. For instance, a payday loan, which is often used to access cash quickly to pay a medical or car bill, contains an outrageous fee that can be compared to paying an annual interest rate of 391%. In contrast, the report predicts that the Postal Service would be able to offer consumers this same service at an effective annual interest rate of as low as 28%.
The report does not suggest that the Postal Service should attempt to compete with traditional banks for customers. Just the opposite. It recommends that the Postal Service explore partnerships with private banks that can bring their expertise to the USPS physical network, and give millions of Americans access to basic banking services such as reloadable prepaid cards, mobile transactions, direct deposits, bill payments, and small loans.
Building these partnerships and capturing this market opportunity could be a game-changer for the Postal Service. With an annual underserved market size of $89 billion, capturing just 10% of this market for basic financial services could bring in $8.9 billion of new revenue each year. These are major figures for an institution that reported a net loss of $5 billion in FY2013 – despite revenue growth and record productivity.
Win-win proposition
Analyzing the recommendations of the report and developing a thoughtful implementation strategy could generate substantial benefits for the Postal Service and the general public.
While it might not be a silver bullet to solve all of the Postal Service's fiscal challenges, capturing even a portion of this opportunity could make a real difference for its bottom line. The Postal Service has already entered into several innovative private sector partnerships with Amazon.com and Staples to increase its revenue-generating opportunities. USPS also currently offers some limited financial services such as money orders and international money transfers – services that could be built upon and expanded with private sector support.
This model of a postal network providing basic financial services has already been successfully implemented around the world. Both Italy and New Zealand allow their postal service's to offer basic financial services and more than 65% of the profits from their respective organizations comes from providing this service.
In addition to the benefits for the Postal Service's bottom line, millions of Americans would be able to access affordable financial services – the same basic services that many of us take for granted each day. Billions of dollars in fees and high interest rates would be saved, effectively raising take-home pay for 68 million Americans. Families who are working paycheck to paycheck could see an average annual savings of over $2,000.
Will it happen?
If strategic partnerships can be forged and a sound implementation plan can be put into place – it should.
While USPS officials are still reviewing the report's recommendations, the debate over whether this change would need Congressional approval has already begun. Whether this is an initiative that the president can advance on his own, or whether Congress needs to come together to support a solution to a national economic challenge – it should get done.
There is also the need to communicate this plan effectively, as proposed; this model would not be a new government effort to invade the private banking industry. It would be creating partnerships with the private sector to leverage the USPS physical infrastructure in order to meet the needs of the market.
The bottom line is that the 68 million Americans who are currently underserved by the mainstream financial system deserve the same basic financial services as the rest of us. When we are presented with solutions to difficult challenges, it is up to us all to come together and act.
