The poor need bank accounts, and USPS has the answer

Democrats are being bold this week. First, a number of senators came out in support of a public option in the labor market through a federally funded job guarantee program.

Wednesday, Sen. Kirsten GillibrandKirsten Elizabeth GillibrandSunday shows preview: Trump stokes intel feud over clearances Boogeywomen — GOP vilifies big-name female Dems Bernie Sanders socialism moves to Democratic mainstream MORE (D-N.Y.) announced new legislation that would provide a public option in basic banking services through the U.S. Postal System. 

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Gillibrand’s bill is an attempt to address the persistent problem of widespread financial exclusion, which means a household is either unbanked or underbanked. Recent data shows that 7 percent of households are simply unbanked since they lack a checking or savings account at a bank.

 

Think about that for a second. They can’t go to their bank or credit union to cash a check or pay a bill. Instead, they have to rely on the predatory alternative financial services, such as payday lenders, check cashing services and the like.  

Another 19.9 percent of American households are underbanked, meaning that at some point during the year, they rely on high-cost alternative financial services to meet their financial needs. That leaves over one-in-four American households excluded from mainstream financial services.

Being financially excluded is expensive, with the average financially excluded household spending nearly 10 percent of its income on fees related to financial services. How can this be? Well, the average payday loan charges the equivalent of nearly a 400 annual percentage rate (APR).

Further, the structure of the payday loans themselves ensures that households are unable to simultaneously pay-off the new loan and regular bills. The result? Eighty percent of new payday loans are simply old loans rolled over into a new loan.

Why does financial exclusion exist in the first place? History has shown that financial exclusion represents the classic problem of ensuring universal access to infrastructure.

Infrastructure regulation acknowledges that we should not expect market pricing based on marginal cost to provide universal access to necessary services, such as postal access, electricity, roads, etc.

The reality is, it is not as profitable to serve low-income and low-wealth groups. Of course, if we had a more equitable society, this wouldn’t be such a catastrophic problem. 

To address these issues, regulators have historically put in place service requirements mandating universal access to these basic services. For example, since its inception, the United States Postal Service has charged the same amount to send a letter to your neighbor as it does to send one across the country.

During the banking deregulations of the 1980s, commercial banks and other depository institutions transitioned away from offering basic, low-cost financial services in favor of pursuing higher-profit activities. This resulted in mainstream banks excluding low-income and low-wealth households through exorbitant fees and simply failing to provide the services they needed.

The recent trend of bank-branch closings also provides an example of financial exclusion by reducing access to traditional financial services in low-income communities. Bank branch closings have accelerated since the financial crisis, with roughly 5,000 branch closings from 2009-2014.

These closings have not been distributed equally. Fully 93 percent of these closings have occurred in ZIP codes with income levels that are below the U.S. median.

To date, policy responses have been inadequate to address these widespread abuses. The Consumer Protection Financial Bureau has, until Mick MulvaneyJohn (Mick) Michael MulvaneySunday shows preview: Trump stokes intel feud over clearances Pentagon, GOP breathe sign of relief after Trump cancels parade Middle-class Americans can't afford another trillion financial crash MORE’s reign, worked tirelessly to improve the financial marketplace for consumers, along with states that have outright banned payday lending.

But regulating from the top-down, as the CFPB primarily does, has its drawbacks. For instance, simply regulating these services out of existence fails to acknowledge that the mainstream banks are not providing viable services for the unbanked and underbanked. Thus, the financially excluded would still be out of luck. 

The Gillibrand bill seeks to address the lack of universal access through the creation of a postal bank. An added bonus of this measure is that it regulates consumer financial protection abuses by making predatory lending practices uncompetitive.

The bill would allow all households to open accounts at the post office, with a $20,000 limit on checking and savings accounts. Further, the bill allows for small-dollar loans capped at $500 at one time.

The rates on these loans are reasonable, with the bill linking the interest rates to the 1-month Treasury bill constant maturity rate, though a low, fixed rate may be preferable.

Through offering financial services at post offices, the bill would provide much of the physical infrastructure needed to counteract the trend of bank-branch closings. The USPS already has the geographic infrastructure to support universal access: a post office in every ZIP code.

But that’s not all. A postal bank providing affordable and stable financial services would place a quality floor in the market for financial services through competition. Services previously provided by alternative financial instructions simply wouldn’t be competitive anymore.

To lock in a true public option, the USPS should steer clear of partnering with predatory lenders or collection agencies, giving them a second chance.

The idea has already garnered widespread support, in large part thanks to the work of scholars, such as Mehrsa Baradaran, among others, who have long worked on the idea of resurrecting a postal bank. 

To fully participate in the modern economy, people need access to financial infrastructure — the ability to cash and write checks, send money, pay bills, have access to credit, etc. A public bank, if done well, could address these glaring problem in the current financial services landscape.

Thomas Herndon is an assistant professor of economics at Loyola Marymount University. Herndon became well-known for his critique of "Growth in a Time of Debt," a widely cited academic paper by Carmen Reinhart and Kenneth Rogoff.

Mark Paul is a postdoctoral associate at the Samuel DuBois Cook Center on Social Equity at Duke University and a visiting fellow at the Roosevelt Institute, a left-leaning think tank.