Postal Banking: Pros, Cons and Consumer Reaction
Will the U.S. Postal Service (USPS) ever offer retail banking services?
In early 2014, the Office of the Inspector General of the U.S. Postal Service began a public dialogue about how the Postal Service could offer retail banking services as a way to promote efficiency. Since then, the public banking option has been debated by progressives and conservatives alike and discussed by those within and outside the financial services industry.
The notion of a postal bank in the U.S. is not a new idea. In 1910, President William Howard Taft signed a bill creating the U.S. Postal Savings System, which only paid a 2.00 percent interest rate on deposits but carried the "the full faith and credit” of the U.S. government. Such an advantage was diluted when the Federal Deposit Insurance Corporation (FDIC) was created in 1933, offering private-sector bank depositors the same deposit insurance guarantee. At its pinnacle in 1947, the postal bank had almost $3.4 billion in deposits, four million users, and more than 7,000 branches.
With private-sectors banks started paying more competitive interest rates on deposits, the popularity of the U.S. Postal Savings System began to wane. Beginning in 1965, leaders of the Postal Service called for an end to the postal banking system. Acting on such endorsements, President Lyndon Johnson officially abolished the system in 1967.
Fast forward to 2014 and the publication of an Office of the Inspector General (OIG) white paper (Providing Non-Bank Financial Services for the Underserved), which explores two proposals for expanding the Postal Service’s presence in the financial services market:
- The sale of a multipurpose reloadable prepaid postal card that could link to a saving account
- Credit services, such as small-dollar consumer loans, offered through the Postal Service
Such financial services could be delivered through a fully chartered postal bank or a partnership with private institutions. According to the Center for Financial Services Innovation, $89 billion was spent in 2012 on alternative financial services. The OIG points out that if just 10 percent of that total was instead spent at the USPS, the cash-strapped independent agency could bring in $8.9 billion per year.
What Do Proponents Say?
Proponents of the OIG proposal suggest postal banking presents an opportunity for the USPS to use its space (31,000 retail offices) and its employees more efficiently to bring needed services to underserved Americans. This demographic (estimated to be a quarter of all U.S. households) typically pays higher prices for basic financial services. As a government-supported, publicly accountable institution and a trusted brand, the USPS is well positioned to fill such a financial services gap. Lastly, postal banking is an innovative way to help the USPS fix its perennial budget woes.
What Do Opponents Say?
Opponents of the OIG’s proposal, who are primarily in the financial services industry, have raised a number of questions regarding postal banking services. What about the USPS’s recent track record in its core mail delivery systems? Does the surge in mobile banking undermine the logic of creating a government-sponsored enterprise that may be harmful to the current financial system? Would the USPS be subject to the same regulations as private-sector banks, especially if the agency offered small-dollar consumer loans?
In order to soften the criticism of his plan, David C. Williams, Postal Service inspector General, has indicated he is more interested in a partnership with private-sector banks than head-to-head competition. To that end, the OIG has been working on a follow-up report about postal banking. This research is expected to take a closer look at the types of products that might be offered in post office branches, as well as potential partnerships with financial institutions.
What Do Consumers Say?
Of course, the biggest question may be if consumers would ever fully embrace accessing financial services through the Postal Service. Raddon’s National Consumer Research shows only nine percent of all consumers would be extremely to very like to use the USPS to access financial services. Consumers who made such a designation are more likely to be 44 years of age or younger and earn $50,000 or less.
Although all sides of the public banking debate present compelling opinions, ultimately it will require congressional action since the Postal Accountability and Enhancement Act of 2006 barred the USPS from providing any new “non-postal services.” Accordingly, whether or not the USPS should offer financial services will continue to be debated for some time.