The Promise and Limits of Postal Banking


It’s easy for Progressives to get excited about the idea of postal banking: a public option for banking! What’s not to love?

I’m glad to see the idea of public options in financial services getting some play of late; it’s something I’ve championed for a while in payments and housing finance. But I think it’s necessary to recognize some of the limits to postal banking. In particular, it's not at all clear to me why we would want to involve the Post Office in the public provision of financial services. What the Post Office offers is a way to recreate a brick-and-mortar branch bank network. This really doesn't make a lot of sense for 21st century banking. Additionally, postal banking is often pitched as an alternative to payday and title lenders. Before we go running down that path, we should think about what it means to have the government in the payday lending business.

Postal banking proposals are a subset of public option banking proposals that aim to solve one of two problems: lack of access to financial services and inadequate competition in financial services. It’s worth exploring each of these issues a little more to understand what postal banking can and cannot deliver.

The access problem is actually two separate problems: the problem of the unbanked and the problem of the underbanked.

Roughly 8% of US households are “unbanked” meaning that they lack a deposit account relationship with a bank or credit union. The unbanked have few sources of credit (you can’t usually get a payday loan without a bank account), but their fundamental problem is lack of access to deposit and payment services.

Another 20% of households are “underbanked”, meaning that they use non-traditional financial services—check cashers, money transmitters, payday and title lenders, etc. These are separate access problems. The underbanked have deposit accounts, but also use non-bank financial services, primarily for credit. The problem faced by the underbanked is the cost of non-traditional credit sources, which can result in a debt trap.

The idea behind contemporary postal banking proposals is that a postal bank could offer lower-cost and more physically accessible deposit, payment, and credit services than private non-bank financial services firms because it wouldn’t have to either (1) pay for overhead or (2) generate a profit. Basically a Postal Bank would have a lower cost of operating than private competitors and also wouldn’t have to compete for capital. (Note that this is a totally different rationale than the original basis for postal banking in the United States, which was as an alternative to deposit insurance as a solution to the bank run problem.)

It isn’t clear to me that the rationale for postal banking really holds up either for the unbanked problem or the underbanked problem. For the unbanked, it would seem simple enough for the Post Office to offer deposit account and payment services. It historically did offer passbook savings accounts, and it already does payments of a sort with money order. Moreover, the Post Office has an unparalleled physical distribution network—it’s in every ZIP code.

But that’s not quite enough, I think. Not all Post Office locations are where you’d want them to be for providing financial services. Moreover, Post Offices aren’t open the right hours for serving the unbanked. If you’re working a 9-5 job, you need a financial service provider that’s open in the evening or early in the morning. Extended Post Office hours starts to cut into the overhead savings advantage. Likewise having to retrain Post Office personnel or change staffing levels starts to cut into the savings advantage.

More importantly, though, it isn’t clear to me why we would want to set up a 20th century brick-and-mortar banking operation in the 21st century. Banks have been shedding branches for a while for a reason. There’s a better way to bank the unbanked. Why not just provide deposit and payment services through government-issued prepaid cards? Treasury already does this successfully with food stamps (SNAP) and Social Security benefits. One could imagine a public option that expands Treasury’s current offerings to allow limited-size deposit accounts (probably $2,000 for AML compliance purposes) that come with a no-fee ATM/debit cards, remote deposit capture, direct deposit, automatic bill payment options, and can be accessed on-line (there are very high rates of smart phone usage among lower-income households). These accounts could be integrated with tax credit provision, etc.

A non-postal public option seems a lot simpler to avoid dealing with the problems of the Post Office and its politics and it also avoids the expense of having to retrofit the Post Office for banking. It’s definitely worth pursuing a public option, but there’s no need to go postal. (I’ll flag here that there’s a big set of data privacy issues involved with a public option bank, but that’s for another day.)

As for the underbanked, I think there’s a separate set of problems. The issue with the underbanked is not about the best channel for providing a public option, but whether there should be a public option at all.  I’m uncomfortable with the idea of public provision of small dollar consumer credit, as the best argument I see for it is that it is less bad than the alternatives.  

We do have indirect public provision of housing credit, small business credit and we have direct public provision of educational credit. The idea in all instances is that the government is fostering wealth and assets building and economic growth (and in housing providing economic stability by bearing risks the private sector will not bear).

There is a wealth building case for public provisions of consumer credit, but it’s weaker. It’s about lower-cost small dollar loans help consumers from digging themselves deeper into debt. If consumers are going to borrow for short-term, small-dollar credit, better that they do so at lower cost.

A second concern about public provision of consumer credit is that it is going to be inevitably politicized. There will be tremendous political pressure on the underwriting. Or, more likely, there won’t be any underwriting (like public student loans).   Doing meaningful underwriting is expensive and eats away at the economic viability of small dollar loan products. The cost of an ability-to-pay analysis is too high a percentage for a small loan. If the credit is risk-priced, there is always the problem of politicized underwriting. Lack of underwriting and hence risk-pricing is not a favor to the government’s balance sheet, and it isn’t necessarily good for borrowers, as risk-pricing can signal appropriate consumption levels to a borrower.

An additional problem that no one wants to discuss is that consumer credit requires collections. Collections are messy. Are we sure want the government garnishing wages or benefits in order to collect public payday loans?  Perhaps the answer is that government payday loans would be friendlier than private ones, so collections are less likely, but there's really no way to run a credit business without collections.  

What all this suggests is that any sort of public option for retail banking—postal or otherwise—would probably do best to avoid offering credit, at least in the first instance. If I’m right on that, we need to recognize that postal banking is not a solution for whatever problems exist in the payday and title loan markets because it isn’t likely to be a substitute source of credit.

But even if you think government provision of small dollar consumer credit is a good idea, why involve the Post Office? Payday lenders operate both from store fronts and on-line. If we’re really going to offer public payday loans, why not do this on-line? Certainly by the time we would ever get a public option bank up and running this will not be a technically difficult proposition.

So three cheers for the public option for deposits and payments—the entry-ticket to modern commercial life—but lots of skepticism about credit.

What all of this says is we should disentangle the benefits of public option banking from the issue of the Post Office. We can have a public option without it being a postal option. Not only does that avoid the thorny political issues attendant to the Post Office, but it also frees our thinking about a 21st century public option for retail banking from the 20th century’s brick-and-mortar paradigm.