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.