Is it the greatest idea since sliced bread or the worst idea since the Ford Edsel?
The U.S. Postal Service Office of Inspector General has published a white paper proposing the money-losing federal agency could solve a lot of problems for underserved populations, and itself, by providing financial services.
The mail delivering agency has been losing billions of dollars annually — $5 billion last year — to competition from FedEx and UPS, not to mention e-mail.
Yet the Postal Service, whose status is enshrined in the Constitution and must therefore carry on delivering mail, figures it could also deliver a “suite of financial services” to the underbanked, bringing in $8.9 billion annually if it captured just 10% the estimated $89 billion this population spends on interest and fees.
The report seems to go out of its way to say that it would not compete directly with financial institutions or compete for mainstream bank customers.
The report is titled “Providing Non-Bank Financial Services for the Underserved,” and most of its analysis is indeed devoted to the one in four U.S. households who do not have bank accounts or who use costly services like payday loans.
The Inspector General (IG) argues that the postal service has a large presence, and high trust, precisely in areas with poor access to retail banking services. For example, a substantial majority of post offices — 59% — are located in ZIP codes with zero or just one bank branch.
Meanwhile, banks have increasingly been shutting down branches, mainly in these very communities.
“An astounding 93% of the bank branch closings since late 2008 have been in ZIP Codes with below-national median household income levels,” the report says.
And yet despite low incomes, the underbanked pay high fees for needed financial transactions — $2,412 on average per household for alternative financial services such as check cashing, money orders, payday lending, pawn shops and the like.
The IG report, for example, cites data that such consumers are spending a median of $32.60 a month on prepaid card fees, encompassing monthly charges, ATM and purchase fees. An alternative Postal Card, it suggests, “could come with fewer and lower fees than others, bringing in an average of, perhaps, $15 a month in fee revenue per consumer. At that rate, if 10% of the 68 million underserved Americans used the Postal Card, the card alone would bring in $1.2 billion a year in revenue.”
The report suggests that the postal services can help in many other areas of financial services, including direct deposits, e-commerce, bill payments, money orders, small loans, mobile transactions and international money transfers.
Industry reaction to the Inspector General’s proposal was swift and harsh. American Banker, an industry trade publication, reported harsh criticism from industry representatives.
"You wouldn't have a FedEx and UPS [United Parcel Service] had the Postal Service been a model of efficiency and service, so you want to unleash that failed model on the financial system? It's the worst idea since the Ford Edsel,” the publication quoted Cam Fine, CEO of the Independent Community Bankers of America, as saying.
And while the white paper was at pains to say it could accomplish its goals “largely by partnering with banks,” commentators, such as Reuters’ Felix Salmon — who favors full-fledged postal banking — called the idea a “Trojan horse” that is using banking to the underserved as a means of gaining Congressional authorization.
“But once the Postal Card is up and running, nothing’s going to stop the Post Office from competing directly with every bank in the country,” Salmon writes.
Sen. Elizabeth Warren, D-Mass., a Banking Committee member and long-time critic of the financial services industry, strongly embraced the IG proposal in an op-ed for the Huffington Post. Commenting on the $2,412 average that 68 million underbanked U.S. adults spend on financial services, she wrote:
“That means the average underserved household spends roughly 10% of its annual income on interest and fees — about the same amount they spend on food.
“Think about that: about 10% of a family's income just to manage getting checks cashed, bills paid and, sometimes, a short-term loan to tide them over. That's more than a full month's income just to try to navigate the basics,” she wrote.
The IG report notes that the U.S. Postal Service has a history in financial services, noting that “from 1911 to 1967, the Postal Savings System gave people the opportunity to make savings deposits at designated Post Offices nationwide.”
That system was especially popular with immigrants — “in 1915, fully 71.8% of the total deposits in the system belonged to foreign-born immigrants,” the report says — and “hit its peak in 1947 with nearly $3.4 billion in savings deposits from more than 4 million customers using more than 8,100 postal units.”
Worldwide, many advanced industrialized nations operate postal banks, and financial services in some instances contribute quite substantially to the bottom line — 71% of operating profits in the case of Switzerland, for example.
The IG report did not comment on investment or retirement services, but proposed without elaboration that the postal service “could incentivize customers to divert a small portion of each paycheck into a savings vehicle tied to their card.”
The report said the postal service’s expansion into financial services would benefit banks:
“The Postal Service would rely on the financial sector to provide the back end for some of these services, including providing Postal Cards, setting up and managing Web and mobile access, servicing the accounts and loans, and possibly funding and holding the loans on their balance sheets,” the report says.
It adds that underserved populations would also be better able to make payments on existing accounts and with improved finances would develop into valuable new customers for mainstream institutions.
Check out Serving the Underserved: How to Help Clients With Modest Incomes on ThinkAdvisor.