Could Postal Banking Save You Money—and the Post Office?

© Provided by The Balance

By Lora Shinn, The Balance

You’re in line at the bank. Or are you in line at the post office? In some countries, the answer is simply “yes.” Now, postal banking is being discussed in the U.S., with potential benefits for those without bank accounts, as well as people currently relying on “alternative financial services,” including check-cashing services and payday loans.

Surprisingly, postal banking isn’t a new idea. Your grandparents may still remember depositing money at the local post office. Here’s more on the concept, including what postal banking might look like if it returns to this country, and its potential benefits and problems.

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The History of Postal Banking

Indeed, postal banking was available for more than 50 years. In 1911, Congress encouraged individuals—predominantly immigrants—to make savings deposits in the Postal Savings System (PSS), rather than hiding cash at home. The system peaked in popularity in the 1930s, when few trusted the banks after numerous bank runs and failures.

PSS operated as a middleman of sorts, offering security to the depositor and a source of cheap, low-interest-rate cash for local banks. It worked like this:

1. The depositor received a 2% interest rate from the PSS, and a guarantee in an era before the Federal Deposit Insurance Corp. (FDIC) insured deposits.
2. The PSS put the cash into a local bank.
3. The banks only paid the PSS 2.25%, a lower interest rate than what they paid to other depositors.
4. The bank then lent the money to community businesses, pocketing any profits made on the difference.

The system was phased out in 1967, as more consumers turned to now-FDIC-insured banks and higher-rate U.S. bonds for better returns. However, the USPS still provides money orders, electronic fund transfers, and U.S. Treasury check-cashing services.

Postal Banking: New Life for an Old Idea

One in four American households are either unbanked or underbanked, noted the August 2020 Biden-Sanders Unity Task Force in recommendations that laid out Biden’s potential policy priorities if elected president. The unbanked (households in which no one has a bank account) and underbanked (those who have bank accounts, but use non-bank financial services) are at risk of losing money due to fees and interest rates that result from payday lenders and check-cashing services.

The Unity Task Force recommendations encourage Democrats to support and promote congressional efforts regarding “bank accounts and real-time payment systems through the Federal Reserve and easily accessible service locations, including postal banking.”

In 2018, Sen. Kirsten Gillibrand (D-N.Y.) introduced the Postal Banking Act to re-establish postal banking. In September 2020, Bernie Sanders (I-Vt.) joined Gillibrand to reintroduce the Postal Banking Act.

The benefits, they said, are twofold. Postal banking could create approximately $9 billion in annual revenue, strengthening the USPS. The act also would decrease dependence on payday lenders in low-income and rural communities.

After all, Sanders and Gillibrand pointed out, the USPS already serves almost every community in the country and could assist up to 10 million Americans who are unbanked or underbanked.

What Could Postal Banking Include?

“I’ve seen several different proposals,” said Alex Horowitz, senior consumer finance research officer at the Pew Charitable Trusts, by phone. The Pew Trusts comprise an independent, nonprofit organization focused on the public interest.

Proposals for implementation range from expanding USPS’s existing financial services—such as adding prepaid cards with savings and bill-paying features—to a public-private partnership between USPS and banks or credit unions, he said. Or, like supermarkets, a bank or credit union could have a mini-branch or customer-service counter for paying bills and cashing checks.

The Postal Banking Act, as introduced first in 2018 and again in September 2020, proposes comprehensive, full-service banking that includes:

• Savings and checking accounts of up to $20,000
• Loans of up to $500
• Checking accounts and interest-bearing savings accounts
• Debit cards
• ATMs
• Check-cashing services
• Automatic bill pay
• Services to send and receive money from U.S.-based and international recipients

Note: In 2020, Chase Bank met with the U.S. Postal Service about leasing a “small number” of spaces for ATMs to “better serve some historically underserved communities.” However, a spokesperson noted these preliminary conversations didn’t lead to an agreement, and there aren’t current plans to move forward.

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Postal Banking: On the Rise

The U.S. postal system is under severe strain. With that in mind, it’s notable that financial services provide between 25% and 71% of postal-service operating revenue in some nations, including the U.K., Switzerland, and New Zealand, according to a 2014 white paper published by the Office of Inspector General at the U.S. Postal Service.

Despite the white paper and support from leaders including Sen. Elizabeth Warren, there hasn’t been much movement forward until recently.

“I’ve worked on postal banking for a long time. I’ve seen a real snowballing of interest in the mainstream in the last few years,” Porter McConnell at Take on Wall Street, a progressive campaign advocating for financial reform, told The Balance by phone. She was pleased that postal banking was in the Unity Task Force recommendations.

More than 3.5 million Americans live more than 10 miles from the nearest bank branch, according to the Pew Trusts. “Proximity to a bank branch is associated with better financial health,” Horowitz said. An easily accessible payday lender could entice someone who lives farther from a bank and is on the financial brink to take out a same-day loan with a triple-digit APR, simply to avoid overdraft and late fees at a bank.

Those fees are partially to blame for unbanked and underbanked individuals avoiding bank services, McConnell said. But geography is as well. “Many unbanked and underbanked households are in rural and urban banking deserts,” McConnell said.

She pointed out that there are more post offices around the nation than Starbucks and McDonald’s locations combined. That “ubiquitous” scale could allow the postal service to ramp up financial offerings quickly, she said, perhaps in combination with point-of-service machines that already have some of the necessary hardware in place.

Challenges of Postal Banking

Some are skeptical of postal banking, in part or altogether.

“It comes down to what's viable and what's not,” Horowitz said. For example, keeping large amounts of cash on site is challenging on a practical level, though selling prepaid debit cards is much easier. “Offering loans is a different story, in terms of the mechanics, risk, and knowledge involved.”

Consultant Jon Voorhees has more than 40 years of experience in pinpointing and optimizing bank and credit union services, branches, and ATMs. Voorhees worries postal banking may be more expensive to offer and manage than earnings the postal service could recoup.

“The USPS can’t have this service be another drain on it, and offering these types of low-volume services to a small segment of the population is challenging for the most experienced firms,” he said in a phone interview.

Establishing the USPS’s lending capability could be costly, particularly if the Postal Service ends up being a last-chance resource for those with poor credit—with default rates to match.

Voorhees said the USPS’s financial troubles might be best remedied by legislative changes to full pre-funding requirements for USPS employee retirement and medical benefits.

Affordable, low-fee credit union accounts featuring low-interest loans and smartphone deposits are current alternatives to check-cashing and payday lending, Voorhees said. Leasing USPS space for bank ATMs might be one solution. Or a consortium of larger banks—with more money to bankroll implementation—could rent a window from USPS to offer banking services.

Note: Financial institutions such as Bank of America and U.S. Bank are moving into small-dollar, short-term lending that could compete with payday lenders, as are paycheck-cashing apps. However, many still have pre-qualifications that some unbanked and underbanked individuals may have a hard time meeting, such as having an existing banking relationship or steady paycheck from one employer.

Then there's a practical customer perspective matter to consider, according to Voorhees: “The post office lines are already too long.”

The Bottom Line

As for the Postal Service’s take? The USPS sent the following statement by email in January 2020, via a spokesperson:

“The Postal Service's mission is to provide the American public with trusted, affordable, universal mail service. Our core function is delivery, not banking. To the extent our research concludes that we can legally provide additional services at a profit and without distracting from our core business, we would consider these. However, public policy and regulatory discussions must be addressed before the Postal Service invests in an area outside our core function.”

Whether that statement changes in the next few years may depend on an agreement regarding postal banking’s goals and ways to create profit-producing, practical solutions that work for the USPS and the target market.

According to a 2014 Pew survey, most respondents who use alternative financial services (payday loans and check-cashing services) would prefer to use lower-cost post-office check cashing, prepaid cards, bill pay, and payday loans. The general public was either indifferent or in favor of prepaid debit cards—with few opposed.

McConnell thinks postal banking could be a sweet spot for President Biden. ”You can’t get more unifying than the post office,” she said. “The universal service mandate works for everyone—rural and urban, Republicans and Democrats, and Black, White, and brown families across the nation.”

See more at The Balance