The Need for Postal Banking
By Albert B. Kelly
I’ve commented before
about the difficulties for lower middle class and poor families in the area of
banking and finance, a critical issue that can keep people in poverty. We’re
talking about the unbanked and underbanked, those needing microloans for
emergencies (a few hundred dollars), payday lenders and fringe banking- those
with a job and even a bank account who live pay check- to- pay check.
Traditional banks don’t
lend small amounts and short of a family member to help out, the option is a
payday lender. Interest on loans from a payday lender can be upwards of 500% so
that the original loan amount can easily turn into a burden of thousands of
dollars. Such is plight of the underbanked.
Locally, we are fortunate
to have several community-minded banks that have the willingness and ability to
find creative ways to help, but tough underwriting standards make micro-lending
difficult and costly for them. Though in many ways, our community banks work
closely with us to improve the quality of life at the local level and we have
examples of this throughout our community.
As it relates to small
loans, Yale Professor Frederick Wherry advocates regulatory changes so that
bank community-oriented banks could affordably provide smaller loans to the
underbanked. Whether the big Wall Street banks would do so is another question.
In her book “How the Other
Half Bank”, Mehrsa Baradaran points out that 75% of fees incurred come from
overdraft fees and 90% of these are paid by 10% of customers, those living
paycheck-to-paycheck. Overdraft fees can be as high as $35 per occurrence.
A 2008 FDIC study notes
that if overdraft fees were treated as the payment a customer makes to the bank
for an extension of credit on the overdrawn amount, it would be the equivalent
of a 3,500% APR.
There’s also the issue of people
who, for one reason or another, don’t have a bank account- 34 million
households representing 68 million adults nationwide. These folks must get
paychecks turned into cash at a check cashing place for a fee. To pay bills, they
must reconvert the cash into money orders or electronic payments for another
fee. In 2012, the unbanked paid $89 billion in such fees and interest.
A January 2014 report
(Providing Non-Bank Financial Services for the Underserved) issued by the
Inspector General’s Office of the US Postal Service, notes those without bank
accounts making $25,500 a year spend $2,400 on fees and charges- roughly 10% of
their income.
That’s no small thing when
we consider that on average, those who filed for bankruptcy in 2012 were about
$26 a month short of meeting their monthly expenses. So what can be done?
One possible solution
addressed in the report was the idea of reviving postal banking which was a
mainstay from 1911 until 1966.
There are roughly 7,000
bank branches nationwide and 1000 to 1,400 are expected to close in the next 5
years. By contrast, there are 35,000 postal-related outlets nationwide- access
won’t be an issue. The post office does not answer to shareholders therefore
they don’t have to fatten up quarterly earnings through fees and high interest.
Historically, postal
banking served immigrants, farmers, and many others who did not have access to
a bank or did not trust banks in the depression years. Much of World War II was
financed through their revenues- all collected through postal banking.
Where banks find it
unprofitable to provide small loans, postal banking could do it easily as they
once did. As a federal agency, Postal Banks would have the ability to garnish
tax returns for those in default on a loan.
Beyond that, with the
Postal Service operating at over a $5.5 billion a year deficit since Congress
changed the rules over a decade ago, the revenue collected for providing
banking services would offset most or all of that deficit while making the post
office more self-sustaining.
Let’s face it, there’s not
a lot of money in providing banking and financial products to the poor and
lower middle class. That’s why the largest mega-banks largely discourage them
through excessive fees and minimum balance requirements.
Consider that the federal
government, using tax payer funds, supports too-big-to-fail-banks through
bailouts, most recently in 2008-2009. Maybe the time has come for the feds to
help people living pay check-to paycheck, the ones being bled by fringe
banking, by reviving postal banking to serve the most financially vulnerable
among us.