ATHENS, Ga. — PEOPLE like to complain about banks popping up like Starbucks on every corner these days. But in poor neighborhoods, the phenomenon is quite the opposite: Over the past couple of decades, the banks have pulled out.
Approximately 88 million people in the United States, or 28 percent of the population, have no bank account at all, or do have a bank account, but primarily rely on check-cashing storefronts, payday lenders, title lenders, or even pawnshops to meet their financial needs. And these lenders charge much more for their services than traditional banks. The average annual income for an “unbanked” family is $25,500, and about 10 percent of that income, or $2,412, goes to fees and interest for gaining access to credit or other financial services.
But a possible solution has appeared, in the unlikely guise of the United States Postal Service. The unwieldy institution, which has essentially been self-funded since 1971, and has maxed out its $15 billion line of credit from the federal government, is in financial straits itself. But what it does have is infrastructure, with a post office in most ZIP codes, and a relationship with residents in every kind of neighborhood, from richest to poorest.
Last week, the office of the U.S.P.S. inspector general released a white paper noting the “huge market” represented by the population that is underserved by traditional banks, and proposing that the post office get into the business of providing financial services to “those whose needs are not being met.” (I wrote a paper years ago suggesting just such an idea.) Postal banking has a powerful advocate in Senator Elizabeth Warren, Democrat of Massachusetts, who has publicly supported the plan.
The U.S.P.S. — which already handles money orders for customers — envisions offering reloadable prepaid debit cards, mobile transactions, domestic and international money transfers, a Bitcoin exchange, and most significantly, small loans. It could offer credit at lower rates than fringe lenders do by taking advantage of economies of scale.
The post office has branches in many low-income neighborhoods that have long been deserted by commercial banks. And people at every level of society have a certain familiarity and comfort in the post office that they do not have in more formal banking institutions — a problem that, as a 2011 study by the Federal Deposit Insurance Corporation demonstrated, can keep the poor from using even the banks that are willing to offer them services.
Many will oppose the idea of a governmental agency providing financial services. Camden R. Fine, chief executive of the Independent Community Bankers of America, has already called the post office proposal “the worst idea since the Ford Edsel.” But the federal government already provides interest-free “financial services” to the largest banks (not to mention the recent bailout funds). And this is done under an implicit social contract: The state supports and insures the banking system, and in return, banks are to provide the general population with access to credit, loans and savings. But in reality, too many are left out.
It wasn’t always this way. In 1910, President William Howard Taft established the government-backed postal savings system for recent immigrants and the poor. It lasted until 1967. The government also supported and insured credit unions and savings-and-loans specifically created to provide credit to low-income earners.
But by the 1990s, there were essentially two forms of banking: regulated and insured mainstream banks to serve the needs of the wealthy and middle class, and a Wild West of unregulated payday lenders and check-cashing joints that answer the needs of the poor — at a price.
People need credit to increase their financial prospects — that’s the theory behind government backing of student loans and mortgages. The Latin root of the word “credit” is credere — to believe. But belief is something that mainstream lenders lack when it comes to assessing the creditworthiness of the poor. And yet establishing credit not only allows individual families and communities to grow wealth, but also allows our economy to do so. Everyone benefits.
There is, of course, a certain irony in the post office, cash-strapped and maxed out on credit, looking to elbow in on the business of check-cashing and payday-loan storefronts. And while the U.S.P.S. white paper stresses that its own offerings, rates and fees would be “more affordable,” a note of alarm is raised when it highlights the potential bonanza that providing financial services to the financially underserved could yield, stating that the result could be “major new revenue for the Postal Service” estimated at $8.9 billion a year. It’s a plan that could indeed save the post office, which last year recorded a $1 billion operating loss.
In this potential transaction between an institution and a population that are both in need, it would be wise to look back a century ago, at the last time a similar experiment was conducted. In 1913, the chief post office inspector, Carter Keene, declared that the postal savings system was not meant to yield a profit: “Its aim is infinitely higher and more important. Its mission is to encourage thrift and economy among all classes of citizens.” Any benefit to the post office’s bottom line should not come at the expense of those who can least afford it.
Mehrsa Baradaran is an assistant professor of law at the University of Georgia, specializing in banking regulation.