Postal Service banking system possible if past pitfalls avoided

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Depending on who you ask, payday lending is either the market’s way of providing small loans to borrowers who do not have sufficient credit to get them through established and regulated financial institutions, or predatory lending that takes advantage of consumers that have no alternative. If you ask us, it is both, which is why Sen. Kirsten Gillibrand’s (D-N.Y.) proposed Postal Banking Act is so promising.

The law would mandate that the United States Postal Service (USPS) offer low-cost retail banking services through its 30,000 nationwide branches. If properly implemented, this would expand banking access to many low-income and rural families, improving their financial well-being, while also helping to shore up the USPS’s finances.

{mosads}As of 2015, about 7 percent of U.S. households were “unbanked,” meaning that no one in the household had a checking or savings account. An additional 20 percent of households were “underbanked,” meaning that they relied, at least in part, on payday lenders, check cashing services, pawn shop loans, or other non-traditional sources for financial services.

Unbanked households typically do not have enough money to warrant having an account, do not trust banks, or cannot afford bank fees, which can eat up the deposits of small-scale customers. By establishing a banking presence in every USPS branch, more than a third of which are in zip codes that do not have any bank branches, the bill would bring banking services to the substantial number of unbanked and underbanked households that are unable or unwilling to access online banking or visit a bank branch in person.

Lower-cost lending services can provide an entry into the formal banking system for the unbanked and free them from costly, and sometimes unscrupulous, alternatives such as payday lenders. Because of the scale of their operations and the lack of available alternatives, payday lenders often charge interest rates in excess of 300 percent. The USPS has estimated that they could provide the same loan for less than 30 percent, a hefty rate, but not one that will crush a less well-off borrower.

Postal savings banks are not a new idea. Britain established the world’s first postal savings bank in 1861. By the end of the 1880s, postal savings banks had spread to Canada, Japan, New Zealand and virtually all of western Europe. The United States also offered postal savings from 1911 through 1966. Countries with postal savings banks find that they not only increase financial inclusion, but also contribute to the post office’s bottom line. The USPS has argued that a postal savings system could accomplish the same objectives in the United States.

Some will argue that the Postal Banking Act will pose a danger to local banks. The original American postal savings system attempted to avoid competing with local financial institutions by capping deposit accounts at small amounts and paying depositors a low interest rate. However, the system was buffeted by sharp movements in market interest rates, which it was legally unable to match.

When rates fell during the Great Depression, depositors fled their local financial institutions in droves, attracted by the unchanged postal savings rate. This increased pressure on local financial institutions and exacerbated housing market distress. When market rates rose during the 1960s, postal rates were similarly unalterable and the system collapsed. Hence, if interest rates in the proposed postal system are not set with the market in mind, the new institution will become a source of instability.

Others will argue that a bank run by the government, or even by a quasi-government agency like the USPS, is a recipe for disaster. In Japan, the postal saving system grew steadily after World War II as it offered very competitive interest rates on savings products. By 1999, total outstanding postal saving deposits constituted more than a third of total household deposit holdings, which were used to feed the fiscally irresponsible central government and quasi-government entities.

In designing a postal banking system, the devil will be in the details. The USPS has advocated in favor of a system in which they do not act as a bank, but merely as a partner and branch of established financial institutions. This would increase the reach of formal finance and allow the USPS to negotiate a deal that would benefit consumers without taking over a large chunk of the banking market or increasing the USPS’s costs.

Research shows that improved access to banking services increases the economic well-being of the poor in developing countries, allowing them to accumulate assets faster, which leads to higher income and lower inequality. It also enables them to better withstand unanticipated financial shocks, such as the loss of a job or an expensive family illness. If Gillibrand’s plan can avoid some of the pitfalls of the American and Japanese postal savings systems, it could yield positive results.

Richard Grossman is a professor of economics at Wesleyan University and a visiting scholar at the Institute of Quantitative Social Science at Harvard University. He served as a visiting international economist at the U.S. Department of State from 1988 to 1990 and is the author of “Wrong: Nine Economic Policy Disasters and What We Can Learn from Them.”

Masami Imai is a professor of economics at Wesleyan University. He is also a research fellow at the Tokyo Center for Economics Research and a member of the Japanese Shadow Financial Regulatory Committee.

Tags economy Finance Government Kirsten Gillibrand Postal Service United States

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