A Unique Remedy for Under-Served Communities

A Unique Remedy for Under-Served Communities December 12, 2015

ONE IDEA I’VE BEEN MEANING TO WRITE ABOUT is a proposal to provide banking services to under-served communities — typically poorer neighborhoods and neighborhoods of color — through the U.S. Postal Service.

As a practical matter, the only financial services now available in those under-served communities are payday lenders and check cashing joints. For those unfamiliar with how such places work, they make their money by charging exorbitant fees to the people in our society who can least afford to bear the cost.

According to a report prepared by the Office of the Inspector General of the U.S. Postal Service: “The entire under-served 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.”

Even if there is a regular bank available in poorer communities, banking in the present day has its own hazards. For someone living close to the bone, virtually any miscalculation resulting in an overdraft will result in a $35 fee they can’t afford — and if they make two mistakes, it is $70, and so on. Those miscalculations are a continuous hazard for any of us: Have you ever noticed that when you open an ordinary checking account, the teller will hand you a brochure with a bunch of legalese of almost Homeric length? That brochure explains in arcane language how happy your bank will be if you make a simple arithmetic error.

(Quick aside about that subject: A few years ago, the fees banks charged got so ridiculous that middle class people began to complain, so Congress actually took action. In the wake of those changes, I called my bank to ask what options were available in the event of an overdraft, and what I was struck by was what wasn’t available: there was no option for “If there’s no money in my account, then the transaction is declined.” The reason that option is not available, I’m convinced, is that the bank doesn’t make money that way.)

For our poorer fellow citizens, the burden of these banking costs is not just an annoying inconvenience. Often it is the difference between eating and not eating, or between being able to afford both medicine and food, and having to choose one over the other.

My favorite senator, Elizabeth Warren of Massachusetts, has described the situation poignantly:

 

(T)he average under-served household spends roughly 10 percent of its annual income on interest and fees — about the same amount they spend on food.

Think about that: about 10 percent 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.

The poor pay more, and that’s one of the reasons people get trapped at the bottom of the economic ladder.

 

The Inspector General’s report I mentioned earlier explained how the Postal Service is uniquely positioned to alleviate this situation because it can

…provide non-bank financial services to those whose needs are not being met by the traditional financial sector. It could accomplish this largely by partnering with banks, who also could lend expertise as the Postal Service structures new offerings.

The Office of Inspector General is not suggesting that the Postal Service become a bank or openly compete with banks. To the contrary, we are suggesting that the Postal Service could greatly complement banks’ offerings. The Postal Service could help financial institutions fill the gaps in their efforts to reach the under-served.

While banks are closing branches all over the country, mostly in low-income areas like rural communities and inner cities, the physical postal network is ubiquitous. The Postal Service also is among the most trusted companies in America, and trust is a critical element for implementing financial services. With affordable financial offerings from the Postal Service, the under-served could collectively save billions of dollars in exorbitant fees and interest.

This could make a big difference to struggling families — on average, people who filed for bankruptcy in 2012 were just $26 per month short of meeting their expenses.

 

While I find the economic arguments persuasive, I am even more persuaded by the moral case for a postal banking system. I think the fact that our poorest citizens are paying $89 billion per year for basic financial services is outrageous. Sen. Warren again:

Families rely on financial services more than ever, but those who need them most — who struggle to make ends meet — too often must contend with sky-high interest rates and tricks and traps buried in the fine print of their loan products.

It is time we provided those citizens with a better alternative than payday lenders and check cashing places. Postal banking can be an important step in providing that alternative.


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  • Tanco

    As is well known, many EU countries have long had postal banks. I remember exchanging dollars for euros at a postal bank in Paris. While the clerks were not exactly keen on customer service, the transaction was efficient and quick. The postal bank also has an ATM. Count the locations of postal banks, and one might find a free ATM a few blocks away from any point in the city.

    One roadblock to financial equality is the insolvency of the Postal Service. In my town, and undoubtedly elsewhere, the big historic post office was sold under duress to a developer. Now the USPS operates out of a tiny storefront. I doubt that many downsized post offices could handle both lines of people with parcels and lines of people waiting to make financial transactions. This could’ve been accommodated with older, larger post offices.

    Perhaps Washington could establish a storefront banking system separate from the Postal Service. This would entail a federal tax increase. While a Democratic administration might be receptive to a partially-privatized alternative to payday loan usury, certainly any Republican administration would bitterly oppose the measure. Under Republican administrations, a public corporation bank would suffer under what I call the “PBS syndrome”: not infrequently, a Republican presidential candidate might claim that if elected he or she will remove all funding from PBS and NPR. This rhetoric implies that the TV service and radio channel are antithetical to conservative political viewpoints. Similarly, a candidate might complain about the lack of financial reserves behind a postal bank as a ruse not to provide a more fair economic service to the struggling poor. A postal bank or subsidized bank need not be the Chase Manhattan Bank our well-heeled representatives and senators might frequent.

  • David Cruz-Uribe, OFS

    Matt, I think there is a lot of merit in your proposal, and when combined with the ever expanding Internet presence of the US Post Office, I think this would be an excellent service. It could probably be set up to break even or even provide a small positive revenue stream and still provide invaluable services.

    The obvious alternative would be to encourage the establishment of credit unions to serve these communities, but these are hampered by the capital costs: both creating the physical locations and arranging the banking capital required to run a bank. I am a big fan of credit unions, but they primarily serve the middle class and the upper end of the working class—folks with steady jobs whose employment gives them access to either a credit union tied to their employer, or the transportation to get to a community credit union that does not have branches in their neighborhood.

    On a related note, I would call attention to the effort by the Catholic Church in Texas to replace usurious payday loans with small loans from St. Vincent de Paul:

    http://www.austindiocese.org/article/14054/program-helps-those-indebted-payday-lenders

    This is following a medieval paradigm and is worthy of emulation. Tuscaloosa is filled with these predators and there ought to be an alternative.

    • David,
      I’ve been curious for a while: is there anything out there one could read about credit unions and Catholic Social Teaching?

      • David Cruz-Uribe, OFS

        Brett, that is a good question and I don’t know the answer. If I recall correctly (though it has been a while) Dorothy Day regarded credit unions as a good step towards her personalist revolution, even though she was opposed to any kind of usury. (She may have been willing to regard the “interest” paid on loans to a credit union as a kind of administrative fee.) But I do not recall seeing anything of this sort discussed in Church documents, even in passing.

  • Tausign

    I think a more viable solution would be to make it a requirement for existing banks to serve these needed areas in a similar fashion to insurance companies taking on unwanted risks in a risk pool. If they want a charter (license) to operate in the state, then the banking officials should institute this requirement across the board. The bank must assume some branch activities in unprofitable neighborhoods in direct proportion to the total of banking services they provide in each state. If this is mandated universally for all banks then there is no competitive disadvantage in doing business; the additional cost gets spread (in a more just fashion) across the entire banking population. Of course, there will be fear of banks leaving en masse…but they won’t because they want to do business. Initially, the cost might trend higher to ‘the average banking consumer’ as they pick up the spread cost…but this could ultimately lead to some new models of banking as well as some very needed reforms and safeguards.