Watch out predatory lenders in the private sector, the Postal Service is gunning for part of your revenues. As Congress Fiddles While the Postal Service Burns, the Postal Service has already cut costs to the bone, atritted its workforce, trimmed back and realigned its transportation networks and defaulted on a multibillion dollar Bush Era mandate that the Postal Service, uniquely of all American agencies and enterprises, must actuarially over-fund the costs for future retiree health benefits. Now the Postal Service is working hard to improve the revenues needed to cover its costs. In a White Paper (warning, PDF) just released by the Postal Service independent Office of Inspector General, which is intimately familiar with USPS financial capabilities and controls, the OIG finds it feasible for the Postal Service to enter the financial services business, particularly serving the now unbanked.
Some of what I see here I like a lot. Other parts, not so much. Follow me out into the tall grass for a closer look at the White Paper and some discussion of issues it raises.
The target is juicy enough. Americans spend nearly $90 billion annually on check cashing fees and payday loans. According to the OIG,
Millions of Americans do not have a bank account, or use costly services like payday loans and check cashing exchanges just to make ends meet . The entire underserved population comprises more than a quarter of all U.S. households — some 68 million adults. They are an economically diverse mix of working and middle class families, poor and unemployed people hurt by the recent economic crisis, young people, immigrants, and others who are trying to make it paycheck to paycheck. Together, they represent a huge market. In 2012, they spent about $89 billion just on interest and fees for alternative financial services.
If the Postal Service could nip off a mere 10% of that market share every year, the $9 billion in revenue would be 150% of FY 2013 total loss from USPS's business. Using existing facilities, personnel, networks, infrastructure, controls, financial standards, red ink magically becomes black ink on the Postal Services ledger.
The OIG White Paper concluded:
The Postal Service is in an excellent and, in some ways, unmatched position to meet these citizens’ needs. A suite of non-bank financial services offered through the Postal Service — available online, through mobile devices, and at Post Offices in every community — could greatly benefit families everywhere. Postal financial services could help American families to save money through avoiding exorbitant fees and interest. This would make it easier for these families to pay their bills on time, build up a more comfortable level of savings, and spend their money in better ways — which would benefit the economy overall. And someday, many of these same families might be able to open a traditional bank savings or checking account. In addition, as shown by ostal organizations all across the globe, moving into financial services has been the best way for posts to shore up their retail networks and find new revenue. As the Postal Service continues to look for new ways to serve the citizens of the 21st century, non-bank financial services may be the “killer app” for diversifying its revenue base.
The idea doesn't lack for precedent. The Postal Service already sells money orders, just like it has for years. More recently, the Postal Service facilitates certain international payments. For most of the 20th Century, the Postal Service was an actual deposit bank.
According to the USPS Official History (warning, PDF),
An Act of Congress of June 25, 1910, established the Postal Savings System in designated Post Offices, effective January 1, 1911. The legislation aimed to get money out of hiding, attract the savings of immigrants accustomed to saving at Post Offices in their native countries, provide safe depositories for people who had lost confidence in banks, and furnish more convenient depositories for working people. The system paid two percent interest per year. Initially, the minimum deposit was $1, and the balance in an account could not exceed $500, excluding interest. Deposits were slow at first, but by 1929, $153 million was on deposit. Savings spurted to $1.2 billion during the 1930s and jumped again during World War II, peaking in 1947 at almost $3.4 billion
That's about $35 billion
adjusted for inflation. That's
two NASA budgets. Not. Chump. Change.
Check cashing services and bill collections are a natural for the Postal Service where cash back is already offered on credit cards, debit cards and checks. But, lending is something the Postal Service has not done previously, except internally. However, the need seems compelling. An investigation in just one small Connecticut city found thousands of unbanked households. According to the Consumer Finance Protection Agency,
Payday loans are typically marketed to bridge a cash flow shortage between pay or benefits checks. They generally have three features: the loans are small dollar amounts; borrowers must repay the loan quickly; and they require that a borrower give lenders access to repayment through a claim on the borrower’s deposit account.
Most loans are for several hundred dollars and have finance charges of $15 or $20 for each $100 borrowed. For the two-week term typical of a payday loan, these fees equate to an Annual Percentage Rate ranging from 391 percent to 521 percent. Loan amounts and finance charges vary depending on state law. If the consumer does not repay the loan in full by the due date, the loan agreement typically permits the lender to cash the consumer’s check to obtain repayment.
Jeez, Louise. These people are loan sharks. Their customers are some of America's most vulnerable people. The Postal Service, already with offices everywhere, open six days a week, could offer short term low dollar loans on much better terms, lower vig. And at USPS, they already know where your family lives, KnowhatImean? Just kidding, about that last part.
I would like to see an America where the general availability of a living wage made payday lending largely an historical anachronism. But until then, it would b nice if those needing those kinds of financial products got a fairer deal, too.
Like everything else the Postal Service needs, Congress must act before we make progress. The payday loan people will pay and lobby like crazy to stop this kind of thing. Which brings us to something I don't much like about the OIG White Paper, the bit about "partnering with banks".
The Postal Service could create a “win-win” situation by partnering with banks and other organizations to provide financial products and services to new customers. Postal financial services could complement the current offerings from banks by helping banks reach customers in new geographic areas, by offering products to customers who were not previously a main focus of banks, and by helping some customers transition to traditional savings or checking accounts. Moreover, a partnership would highlight what each partner brings to the table. The Postal Service offers trust, a vast physical network, and other critical assets. Banks offer reliability, expertise, and competence when it comes to financial transactions. They also could provide valuable knowledge that could help the Postal Service structure new offerings. The end results could be new services for customers, more revenue for banks, and an easier way for the Postal Service toexpand its presence in the financial services market. In addition, the right partners could bring much needed startup cash to the table as part of the deal, overcoming the Postal Service’s current funding limitations
Am I the only one who wants a shower after reading that. Still, it is somewhat understandable. During the Postal Service's foray into the savings account business in the 20th Century, the banks first opposed it, then found out how to profit from it. From Appendix A of the OIG White Paper:
Initial banking industry opposition to the system turned into support when bankers realized that the system was successfully drawing in a lot of money that used to be stored away in cookie jars and other hidden places. To minimize competition with banks, deposits were limited to $500 and the interest rate to 2 percent. Deposited funds were to be funneled to local banks, which would pay a 2.25 percent interest rate for the money—considerably less than the 3.5 percent that most banks were paying for deposits at that time, and lower than the interest paid to depositors by any other post in the world. Because banks would use the postal deposits to fund loans to local consumers and businesses, the economic benefits of those deposits stayed with local communities. Banks found they had little reason to oppose an institution providing them a source of cheap money, so not much controversy surrounded increases in deposit limits to $1,000 in 1916 and $2,500 in 1918. The 2 percent interest rate for depositors was never changed, but the 2.25 percent rate paid by banks to the Postal Savings System was raised to 2.5 percent in 1934.
Perhaps enlisting the regular banking industry as a partner the Postal Service could fight off the political backlash from the loan sharking industry if Congress considered letting the Postal Service compete for payday loan business.
The OIG White Paper is an interesting read. I haven't even touched upon entire sections, including the exploration of successes that foreign post offices are having marking consumer financial products.
The saga of the U.S. Postal Service, one of America's oldest and most venerable institutions, continues to unfold as USPS navigates the most tumultuous and dangrous rapids ever encountered in its journey through American History.