The next frontier for America's high-tech financial services industry could be a very old fashioned environment: the United States Post Office, or US Postal Service. The Post Office itself has actually put out a plan that sounds like a demand for a merger with a financial services firm.
The plan is a 27-page whitepaper, titled "Providing Non-Financial Services for the Underserved". This document notes that there is an incredible money making opportunity at the Post Office's doorstep—the so-called alternative financial services industry (in plain English, payday lenders and check cashing outlets). Like Walmart, American Express, Bank of America, and a number of other companies, the money-losing Postal Service has realized that there is big money to be made in servicing this sector.
The white paper states that the alternative financial services industry generated $89 billion in 2012 and that the USPS could earn $8.9 billion in revenue by getting into that business. It would enter the business by providing small loans, prepaid credit or debit cards, international money transfers, e-commerce direct deposit, check cashing electronic bill payments, ATMs, and other services to those without banks. The document even mentions providing checking and savings accounts to the poor.
Banking for the Poor Could Be Big Business
Okay, this sounds like a plan to turn the post office into a bank or a financial services company. The document even mentions a "partner bank" with FDIC insurance that would cover the accounts. That sounds like the arrangement Wal-Mart Stores (WMT 0.09%) has with American Express (AXP 0.27%).
Those of us who have been watching the financial services industry know that the cashless economy in the form of PayPal and Bitcoin is growing. Yet that industry faces challenges, particularly in the form of servicing poor people that don't trust or like banks and those that have been effectively pushed out of the normal banking system by credit scores.
This could be a huge market: the whitepaper estimates that one out of four U.S. households lives outside the financial mainstream. It also notes that the average underserved household spends $2,412 on interest payments and fees for services like payday loans and check cashing.
Okay, the market is there, but how to reach it? The Postal Service's proposal is to use the neighborhood post office as a sort of alternative bank. It'd serve those without access to traditional banks and give persons that take advantage of virtual financial services, such as Bank of Internet, PayPal, BitCoin, and AccountNow, a place to get cash and other hard financial services. Two big winners from such a postal banking scheme could be eBay (which owns PayPal) and Bank of Internet, the fast growing virtual bank.
B of A Is Already in the Market
The interesting question is, how will this affect investors in the financial services industry? Well, it would provide a big new competitor to traditional financial services companies and banks. It could also be a huge cash cow for whatever financial services company or bank the Post Office jumps into bed with.
Some traditional banks already recognize this and are entering the arena. The most interesting entry and the biggest threat to a postal bank is Bank of America (BAC 0.92%). BoA is offering a new hybrid product called Safe Balance that combines the attributes of a checking account and a prepaid debit card. The interesting thing is that customers don't get paper checks with Safe Balance. Instead, they get access to most of BoA's services, such as online bill pay, ATMs, and an FDIC insured bank account.
In other words, Bank of America is already doing what the Post Office wants to do. That means the Post Office's plan could be unnecessary. Yet it probably won't go away because of the cash it could generate. The plan has high powered political support from Democratic superstar Sen. Elizabeth Warren of Massachusetts and opposition from a big name Republican, Rep. Darrel Issa of California.
Investors should watch this plan because it could profoundly change the financial services industry. That could lead to new opportunities for shrewd investors and new threats for some companies.