What’s postal banking, and how could it address income inequality?
With the United States Postal Service in the news these past few weeks (101PC covered it last week), let’s take a brief look at a related topic: postal banking.
For those who are curious, here’s a review of what postal banking is, its history in the U.S., the arguments for and against it now, and who this would impact if it were implemented again.
What is postal banking?
The concept of postal banking is a pretty simple one: post offices would offer banking services like savings accounts, paycheck cashing, bill payments, and small loan disbursements.
For 56 years, the U.S. actually had a postal savings system in place. Starting in 1911, you could visit your local post office and deposit money into a savings account, though other banking services weren’t available.
The postal savings system was popular at the time of its implementation, primarily because it was a dependable alternative to private banks. Before the FDIC existed, private banks were far more susceptible to economic downturns (and robberies). Many were also poorly managed and frequently victims of fraud. They simply weren’t a sure bet for farmers and workers who otherwise didn’t have the means to build wealth.
Reportedly, the postal savings system had nearly $3.4 billion in assets at its height in 1947, with 4 million Americans having accounts within this system. However, as private banks became more dependable and accessible, the postal savings system slowly shrank until the banking lobby successfully pushed for its abolition in 1967.
Since this point, banking regulations have changed dramatically, with consequences. For instance, deregulation throughout the 1980s can be traced to the foreclosure crisis in the 2000s. There were improvements to regulations after this, like the Dodd-Frank Act, but these have been somewhat de-re-regulated (re-deregulated…?) within the last two years.
How do people feel about postal banking now?
Many arguments against this today mirror opposition from fifty years ago, in that they’re less supportive of banking regulation and “big government.” The American Bankers Association and the Independent Community Bankers of America are two groups that have been outspoken opponents.
For starters, instituting a new postal banking system would require the federal government to wade further into banking. By setting its own rates and fees for postal banking, it would affect those of private banks. Pricing postal banking products below current market prices—an important component of recent postal banking legislation—would also be mean it wouldn’t be very profitable.
There are also questions about whether or not the USPS is up to the task. It’s been operating with a structural budget deficit for several years; what would the added services do to its bottom line? And would these services be of a good quality and worth all the trouble?
Other than these, there aren’t many valid concerns. Some say this would destroy the payday lender industry. But that’s arguably part of the point of postal banking, since payday lending’s predatory practices contribute to the issue that needs to be addressed. Others say the crisis that prompted the renewed interest in postal banking is overblown. It isn’t, and we’ll cover that in a second.
Overall, the valid points against postal banking fall strictly along philosophical lines. The rest simply lack rationality or consideration for data.
Supporters today see the potential that banking through the USPS could offer. Progressive members of Congress like senators Kirsten Gillibrand (D-NY), Elizabeth Warren (D-MA), and Bernie Sanders (I-VT) have proposed legislation or included it in their platforms over the last few years. The USPS Inspector General also supported exploring postal banking back in 2014.
Similar to its grassroots support 100 years, ago, postal banking is seen as an equalizer for low income and rural communities that otherwise don’t have access to banking services. Both of these populations are prominent among households considered unbanked (no one in the household has a checking or savings account) and underbanked (at least one person has an account but also relies on extra-banking industry measures, like payday loans).
In a 2017 report, the FDIC found that 6.5% of American households were unbanked and another 18.7% were underbanked. While these have been trending down over the last decade, the unbanked/underbanked still constitute a quarter of U.S. households.
Most unbanked households stated they simply didn’t have enough money to place into an account, or that they were concerned with how expensive account fees could be. Others simply don’t trust banks at all.
A small portion also cited inconvenient bank locations as a reason. Bank deserts, communities lacking bank branches, disproportionately impact rural and low income communities and those of color. That impact can actually follow you around for the rest of your life; you are less able to build credit, so you’ll have more trouble getting approved for things like mortgages.
A postal banking system would offer an alternative to these households and save them from taking riskier measures. It would make the 31,000 post offices into access points for the communities who are less likely to be financially comfortable and less likely to have access to online banking. (Over half of the post offices in the U.S. are already in bank deserts, after all.)
Something like this could cascade into other things, like more secure housing—better access to banking could mean better credit scores and better chance of approval for mortgages. Income inequality in general could take a significant hit.
If this seems like a no-brainer …it’s because it’s a no-brainer.
Postal banking won’t be a panacea for the USPS’ budget woes, but it could help the service expand and diversify its operations. There would be some additional costs at first for the Postal Service to get its banking system off the ground, but over time this would be a huge boon for communities that need this most.
We can hear out what opponents to this have to say, but it’s difficult to reconcile some of their concerns since they just don’t seem to grasp why this is needed in the first place.
Postal banking could be an important part of an aggressive campaign to address inequalities in the U.S. We know that better access to banking is needed for parts of our communities. We just need to get out of our own way and offer this public service.
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Sources and related reading
Here are some pieces on the history of postal banking in the U.S.:
Some other readings:
- Newsweek has a breakdown of the arguments for and against postal banking, with a great rebuttal at the end to a particular opponent: the Independent Community Bankers of America.
- HuffPost offers three possible benefits to postal banking.
- The Brookings Institute explores some reasons not to implement postal banking.
- The Atlantic explains the pitfalls of living in a bank desert.
- Investopedia reviews banking regulation history in the U.S.
- NASDAQ has the deets on a Trump-backed 2018 bill that chipped away at bank regulations.