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By Tripp Baltz
July 7 — The U.S. Postal Service may be uniquely positioned to meet the financial services needs of the estimated 68 million American adults without bank accounts, who resort instead to payday lenders and check cashing exchanges that frequently charge exorbitant fees, according to policy makers.
The change might allow the USPS to halt its budget free-fall with a new revenue source.
The USPS said May 9 that it had ended the second quarter of its 2014 fiscal year with a net loss of $1.9 billion, marking the 20th of the last 22 quarters it has sustained a loss. Despite cost-cutting, the USPS will incur annual inflationary cost increases of about $1.2 billion, Postmaster General and Chief Executive Officer Patrick Donahoe said in a statement.
The situation has prompted proposals to allow the Postal Service to provide non-bank financial services, and among them are the recommendations in a 2014 Office of Inspector General report. The concept harkens back to the Postal Savings System, which from 1911 to 1967 let people make deposits at designated post offices nationwide. It also reflects postal banking systems in Asia and Europe.
“In the global history of saving money, postal savings occupies a very central place,” Sheldon Garon, Nissan Professor in Japanese Studies at Princeton University, told Bloomberg BNA June 30.
Garon, who wrote “Beyond Our Means: Why America Spends While the World Saves,” says the U.S. could “kill two birds with one stone” by reviving postal savings and allowing the USPS to provide certain financial services instead of closing post offices, reducing hours and eliminating Saturday delivery. “We have the opportunity to save the post office but also drastically expand financial inclusion,” of people without the access or means to use banks, he said.
Banking industry representatives were harshly critical.
“The Postal Service has been running deficits for many, many years,” Richard Hunt, president and chief executive officer of the Consumer Bankers Association (CBA), told Bloomberg BNA July 1. “I don't know why OIG feels they have the capability of providing financial services, when they have a hard enough time providing mail-delivery services.”
Congressional proposals for USPS financial services have run aground, said Tom Crosson, a CBA spokesman. The association represents the retail banking industry, including the nation's largest bank holding companies and regional and super-community banks. “There is no way anything on that is going to move forward [in Congress] anytime soon,” he told Bloomberg BNA July 1.
To date, nearly all attempts to create payday loan alternatives “have been charity-based, required government subsidies, or were unprofitable and unsustainable,” said Dennis Shaul, CEO of the Community Financial Services Association of America, which represents the payday industry. “The private sector remains the best opportunity for serving small-dollar, short-term loans,” he said.
Camden Fine, CEO of the Independent Community Bankers of America, was more blunt, calling post office banking “the worst idea since the Ford Edsel,” a late 1950s car model that sold poorly.
Post office banking is “the worst idea since the Ford Edsel.”Camden R. Fine, CEO, Independent Community Bankers of America
But proponents took as their inspiration a Jan. 27, 2014, white paper by the Office of the Inspector General of the USPS, “Providing Non-Bank Financial Services for the Underserved.”
In the report, the OIG recommended that post offices begin providing new services—including small-dollar loans and prepaid “Postal Cards” that could be used to make purchases, access ATMs, and pay bills online. The USPS already provides money orders, international money transfers, and related services.
Postal Service fees would be much lower—less than one-tenth of the fees charged for a typical payday loan, according to the OIG.
“If even one-tenth of the 12 million Americans who take out a payday loan each year got this hypothetical Postal Loan instead, they could collectively save more than half a billion dollars a year in fees and interest,” the OIG report said.
Congressional supporters of the recommendations stepped forward immediately after the report's release.
“This is a win-win that we can achieve quickly and at little cost,” Rep. Elijah E. Cummings (D-Md.), ranking member of the Committee on Oversight and Government Reform, said Jan. 29 in a statement.
The OIG report said it wasn't suggesting the USPS become a bank or compete with banks.
However, a suite of financial services offered at the nation's 32,000 post offices could help the underserved become more financially secure, offer products to customers who aren't a focus of banks, and help unbanked customers transition to conventional savings or checking accounts, the report said.
“If the Postal Service offered basic banking services—nothing fancy, just basic bill paying, check cashing and small dollar loans—then it could provide affordable financial services for underserved families, and, at the same time, shore up its own financial footing,” Sen. Elizabeth Warren (D-Mass.), member of the Senate Committee on Banking, Housing, and Urban Affairs, said Feb. 1.
More than one of every four U.S. households lacks a bank account, the OIG said. Of those, the average household earns $25,500 and spends about $2,412 of that on fees and interest charged by payday lenders and other alternative financial service providers, it said. That's 9.5 percent of their income, roughly equal to what they spend on food in a year, it said.
The OIG also put a dollar amount on the benefits that the mission expansion might bring to the USPS.
“If even 10 percent of what the underserved currently spend on interest and fees instead went to more affordable offerings from the Postal Service, it could lead to $8.9 billion in new revenue per year” for the service, it said. “The millions of citizens currently struggling would have new ways to conduct their financial transactions.”
“The millions of citizens currently struggling would have new ways to conduct their financial transactions.”USPS OIG report
Outside the U.S., post offices are playing a leading role in advancing financial inclusion of the underserved, according to an October 2013 report by the Development Research Group of the World Bank.
In Brazil, for example, more than 10 million accounts were opened from 2002-2011, after the country's postal service established “Banco Postal” under a partnership model with an existing financial institution. New post office banks have been created in France and Italy in the past decade.
Japan Post Bank operated as a government department from its introduction in 1875 until it was privatized in 2006, Patricia Maclachlan, the Mitsubishi Heavy Industry Professor of Japanese Studies at the University of Texas at Austin, told Bloomberg BNA April 25.
Now Japan Post Bank is the largest bank depository in the world, she said.
One reason post office banking has been so successful in Japan is that it began before commercial banks became viable. After commercial banking caught on, banks provided services for major companies, while post offices catered to the small-scale saver,” she said.
The government guarantees deposit principal and interest at Japan Post Bank, Maclachlan said. “Also, the network of post offices is ubiquitous, probably more so than any other postal system in the world, so it has contact with local residents and provides convenience for customers,” she said.
Given the worldwide presence of post offices in rural and poor communities, they are more likely than banks to provide accounts to individuals who are poor, less educated, or not working, the World Bank report said.
The majority of U.S. post offices are in what the OIG report called “bank deserts.” The report said 59 percent of internally managed post offices are in zip codes with no bank branches or just one bank. Thirty-eight are in zip codes with no banks.
Because the USPS has an obligation as well as the capacity to serve the entire nation's population, it is distinct from conventional private banks that “allocate their institutional resources to service the sectors of the population they deem most profitable,” said Ellen Brown, president emeritus of the Public Banking Institute, which advocates for postal financial services.
Other countries have expanded into postal financial services to maintain the profitability of their postal network, she said. “Maintaining post offices in some rural or low-income areas can be a losing proposition, so the postal service often cross-subsidizes with other activities to maintain its universal network,” she said.
Post office banking has been touted for its potential to fund the rebuilding of the nation's bridges, highways, sewer system, electrical grids, transportation hubs and other infrastructure.
In July 2013, Frederic Rolando, president of the National Association of Letter Carriers (NALC), called for the creation of a national infrastructure bank (NIB) with the nation's post offices as its “retail network.” Post office banks could fund infrastructure projects selected by the nonpartisan NIB, he said.
Opposition to using taxpayer money to fund the NIB has slowed the idea, Rolando said.
“But what if we set up the NIB without using taxpayer funds?” he asked in an editorial published in the Postal Record, the NALC's newsletter. “What if we allowed Americans to open savings accounts in the nation's post offices and directed those funds into national infrastructure bonds that would earn interest for depositors and fund job-creating projects to replace and modernize our crumbling infrastructure?”
Public postal banks are profitable “because their market is large and their costs are low,” Brown said. “The infrastructure is already built and available, advertising costs are minimal, and government-owned banks don't reward their management with extravagant bonuses or commissions that drain profits away. Profits return to the government and the people.”
When the Postal Savings System hit its peak in 1947, it had nearly $3.4 billion in savings from more than 4 million customers using more than 8,100 postal units, according to the OIG report.
Maclachlan said that the system was more popular with immigrants from Europe than with other Americans.
The system was discontinued in 1967 following a long decline in usage. “It was getting trounced by the high interest rates paid by commercial banks,” she said.
The very first postal bank was started in the U.K. in 1861, said Garon, who is also a professor of history and East Asian Studies. “It was very compelling internationally, and in the next 20 years it spread to other nations. By 1875 it had gotten to Japan, which eventually produced the largest bank in the world. It was big in Europe and a lot of African countries—popular almost everywhere else in the world, except for here,” he said.
Congress authorized postal savings in 1911, “and it never really did very well in this country,” Garon said. When Congress abolished it, “most Americans didn't know it was there to be abolished,” he said.
Much of the system's decline “had to do with the same forces that exist today in the American banking industry,” he said. “The commercial banking system here was way more organized and richer than the commercial banking sector in any other country. After the American Civil War, banks emerged as a powerful lobby politically and financially, and they fought postal savings tooth and nail.”
Following the financial Panic of 1907, shaking confidence in traditional banks, citizens began to clamor “for a safe, secure, convenient postal savings system.”
But when Congress passed the postal savings law in 1910, they made the system weak because of pressure from the banking lobby, Garon said. For example, commercial banks were paying 3 percent to 4 percent interest at the time, but postal savings were limited to only 1 percent, he said.
“After the American Civil War, banks emerged as a powerful lobby politically and financially, and they fought postal savings tooth and nail.” Sheldon Garon, Princeton University
Also, they denied banking services to post offices in rural areas. “Banks didn't want post offices to come in to rural areas and take customers,” he said. “Now some commercial banks are going crazy over this latest proposal, while acknowledging they can't make money on lower income people or in rural areas. They want to have it both ways, and that's what they were doing in 1910, as well.”
Today, rural areas present the biggest opportunity for post office banking to have a positive impact, Jennifer Tescher, president and CEO of the Center for Financial Services Innovation in Chicago, told BNA June 30.
“I live in a very dense neighborhood in a big city, and I have to go pretty far to find a post office,” she said. “But I have millions of other options.”
In a small town, the post office is often the most important institution, she said. “Plus the postal worker is from that community, so there's some trust there.”
The Postal Service is one of the most trusted government agencies in the U.S., Mark Dimondstein, president of the American Postal Workers Union (APWU) in Washington, told Bloomberg BNA July 1. He cited the OIG report as saying 68 percent of respondents in a recent market survey agreed or strongly agreed the Postal Service was reliable and trustworthy.
The OIG recommendations are steps the Postal Service “has the full authority to take without legislative changes,” he said. “We see this as all pro, no con.”
APWU is forming a coalition with other postal unions—including NALC, the National Postal Mail Handlers and the National Rural Carriers Association, to push for the USPS Board of Governors to implement the recommendations.
The Pew Charitable Trusts will be hosting a one-day event July 16 to explore the implications of the OIG recommendations. Keynote speakers are to include Warren; Rep. Darrell Issa (R-Calif.), chairman of the House Committee on Oversight and Government Reform; David Williams, Inspector General of the USPS; Ruth Goldway, chairman of the Postal Regulatory Commission; and former Rep. Tom Davis (R-Va.).
To contact the reporter on this story: Tripp Baltz in Denver at firstname.lastname@example.org
To contact the editor responsible for this story: Heather Rothman at email@example.com
The January 27, 2014 U.S. Postal Service Office of the Inspector General report is at http://op.bna.com/der.nsf/r?Open=tbay-9lnpd6.
The report by the Development Research Group of the World Bank is available at http://op.bna.com/der.nsf/r?Open=tbay-9lsnrn.
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