Last week presidential candidate Sen. Bernie Sanders and freshman New York Rep. Alexandria Ocasio-Cortez made a lot of headlines with the Loan Shark Prevention Act — a big, wide-ranging piece of consumer protection legislation that would do two main things.
First, it would cap the interest that could be charged by credit cards (and other forms of unsecured credit like payday loans) at a 15 percent annual percentage rate (APR). Second, the proposed legislation would turn roughly 30,000 post offices into providers of low-cost basic financial services, including checking accounts, savings accounts and some loans.
The first part of the legislation, the part about capping credit cards, has received a lot of attention thus far, both positive and negative. Supporters of the bill have called it a hallmark consumer protection law that will beat back the epidemic of predatory lending unleashed by the world’s largest banks on the nation’s most vulnerable consumers. Critics, on the other hand, note that however well-intentioned the law is, the reality is that price caps have historically brought a host of unintended consequences that end up costing consumers more than whatever they were being protected from.
What has gotten a good deal less attention is the postal banking part of the proposal. That is a bit odd because the two proposals are very much connected. When opponents of the law point out that card rate capping is mostly likely to be the end of access to credit for all but super-prime customers, the postal bank is named as the solution. The theory is that unlike the big private banks, which are beholden to the profit motives of shareholders, public banks are accountable to the people and do not need to charge exorbitant interest rates to turn a profit. This in turns means they will be able to serve a wider and more diverse base of customers.
Moreover, advocates note, as successful pubic banks around the world, particularly in France and the U.K., have demonstrated over the last three or four decades, public banking opens up access to banks in underserved communities. Banks need to be able to profitably support branch locations and they are not inexpensive. But every community has to have a post office — and turning them into branch locations instantly switches banking access on for everyone.
And, for an additional bonus, postal banking would give the post office a more profitable reason to exist in the era of electronic mail. As of today, the U.S. Postal Service is largely dependent on Amazon bulk shipping for its revenue, and is running constantly in the red.
As Los Angeles Time columnist David Lazarus said, citing presidential candidate Sen. Kirsten Gillibrand, “A Postal Bank would be an elegant solution to a variety of problems.”
Or at least it seems to be one on paper — but there are more than a few issues that need to be considered before determining it is the solution to all financial ills.
It is worth noting, for example, that the United States has had postal banking in the past — from 1911 to 1967. It was initially pitched toward new immigrants to the United States, and was reportedly quite successful for a time in stabilizing the banking system, particularly before the era of the FDIC. However, the reason postal banking is no longer present in the United States is that consumers didn’t want it — they preferred private banks which were comparably priced and offered a wider range of services. The postal bank was discontinued because not enough consumers were using it. Now it is certainly fair to note that much has changed in the banking industry in the intervening 53 years, such that preferences may have changed. But unlike other nations that have liked their postal banking systems enough to stay with them for over 100 years, American consumers bailed out on theirs half a century ago and there is no guarantee they’ve been waiting for a chance to remake that choice.
And it is worth mentioning that for all of postal banking's global success stories, there are a few cautionary tales as well. Japan founded its first postal bank in 1875, and at the height of its power Japan Post held about $3 trillion in savings and insurance deposits and was considered by some the world's largest bank. However, corruption was an endemic problem and Japanese lawmakers developed a nasty habit of using the bank as a slush fund for pet projects. It was privatized under a cloud of scandal in 2006.
Postal management also doesn’t want to run a bank — a fact it has reaffirmed continuously since 2014 when the idea of postal banking first started receiving mass media attention. Post offices do not have vaults or any of the other mandated security features bank branches have, postal workers are not trained to handle money, know their customers or spot money laundering; they have no experience in risk management or loan underwriting. Post offices have no digital infrastructure ready to handle mobile and digital banking and no expertise in building it or maintaining it.
In short, delivering the mail and providing banking services are not similar activities. While it might be possible to turn the post office into a bank, doing so is not going to be as easy as hanging a “now open for banking” sign on the front door of 30,000 American post offices and calling it a weekend. It would require a nearly ground-up rebuilding, restaffing and retraining effort to completely repurpose an entire federal department. That effort would neither be cheap nor fast.
On top of that, Peter Conti Brown pointed out in a paper for the Brookings Institution, even if one were to climb over all the extreme logistical challenges of turning the post office into a bank, there is good reason to believe consumers may actually find they really, really don’t like this arrangement at all. Brown points out that soon after entering the wonderful world of full service banking, a postal banker will face a borrower in default.
“Default is an inevitable aspect of banking,” he said, and given that postal banking schemes are specifically targeted at low-income populations living paycheck to paycheck even in good times, default expectations will be much higher.
“It is difficult to imagine politicians, citizens, and customers having the stomach to abide the collection on nonperforming loans when the collector is the government itself. Indeed, we have experience with this: The IRS flexes its significant might regularly, to garnish wages, enforce liens, and otherwise make its presence felt in the face of unpaid tax debts,” he wrote.
Everyone hates the IRS, Brown notes, saying it is in fact the second most hated U.S. government office. The U.S. Postal Service, on the other hand, is the most popular U.S. agency by a very wide margin. He asks, “Would the USPS be able to maintain that popularity when its ethos includes wage garnishment and repossession? Do we want the government in this business at all?”
Even if it could maintain its reputation, however, do we really want the postal service running a bank? Beloved though it may be, the reality is that it runs year-in and year-out on a massive deficit and has been out-innovated by logistics and delivery companies like Amazon, FedEx and UPS. Taking an organization that is having a hard time delivering the mail without going bankrupt and turning it loose on banking might be a fast way to end up with a public bank that ends up like Amtrak — another great government experiment on paper that has hit some real roadblocks (or track blocks).
The question is whether the government's involvement here adds anything — and whether going back to a form of banking that died out for lack of consumer interest 50 years ago is better than innovating new banking forms to meet the needs of more customers in the private sector.
Nonetheless, at present, it seems many people think they would in fact like the government to be in this business. But as elegant a solution as postal banking seems to be, it is not an easy or an obvious one.
It’s a billion-plus dollar project that consumers may or may not actually take a shine to — and one the postal service may or may not be up to actually taking on.