By Karen Shaw Petrou
Yes, I know – getting the post office into finance when you despair of getting your own mail, not the neighbor’s, is a stretch. But the economics of small-dollar banking under the post-crisis monetary and regulatory framework force a hard choice: create an equality-focused utility for otherwise-unbankable customers or consign them to the only financial sector that profits from them: predatory companies. Maybe someday fintech will figure out a way to handle huge volumes of small transactions, but some day is far away and un- and under-banked customers are losing income and wealth every day they cannot obtain affordable, sustainable financial services.
If the post office can’t make this happen – and that’s far from certain – then banks or credit unions should consider setting up their own utility to do good and still do well enough thereby.
Desirable though a USPS financial operation might be, it’s not all that easy to put the post office into equality-focused finance without posing risks to the beleaguered USPS, competitive threats to private-sector companies, and questions about the extent to which a taxpayer-backed service could quickly morph into a mainstream bank. Legislation (S. 2755) introduced on April 25 by New York Democrat and Presidential hopeful Sen. Kirsten Gillibrand shows both the promise and perils of postal banking, with the checkered history of past USPS financial offerings and the hazards of far larger, international institutions also a cautionary tales. In the U.S., post-office banking ended in 1967 because of large losses due to fixed-income products in a rising-rate environment. In Japan, the post office is a behemoth bank that not only undermines private-sector retail finance, but also serves as a spigot for trillions in politically-motivated, high-risk infrastructure investments. The Gillibrand bill wants to avoid the Japanese precedent, apparently intending that the funds deposited by customers at the Post Office be used only to fund the loans it makes. However, the legislative language is opaque. Although the USPS could not directly fund the bridges to nowhere funded by Japan’s postal bank, risks remain whenever profits can be deployed for institutional, personal, or political purpose.
It is also unclear if the USPS could make loans even if it could not fund them – a “capitalization” facility in the language suggests it could or even would have to. What would happen if deposits exceed loan demand, giving the USPS money that would have to go somewhere? Unless that money is in a very safe place – Treasury obligations look good to me – the post-office bank will be a very risky business. Language related to this capitalization facility seemingly allowing the USPS to share profits with an “offering organization” also has me scratching my head, but it too appears to be a license for risk and/or mischief.
Under the Gillibrand bill, permissible USPS charges would be very low in relation to overall market rates, making the loans affordable and limiting depositors to those not able to do better at a private bank. However, the drafting of the deposit limit is porous, creating more competitive potential than the legislation intends.
Further and still more problematic, the legislation authorizes a wide range of transaction-account services with no rate or fee ceilings and thus considerable potential to take over key ancillary-service products (e.g., online bill payment, mobile banking). “Other” basic products are also unlimited. Thus, no restrictions on amount, customer, cost, price, or objective would constrain any USPS ambitions to pick apart the financial-intermediation value chain.
One way to solve for this “mission-creep” potential would be to set eligibility criteria for USPS customers. This is challenging on a per-customer basis – asking individuals lining up for banking to provide a personal net-worth and income statement is not only a logistical nightmare, but also a violation of the usual norms of personal privacy. A practical alternative would be to limit USPS banking to post offices in low-income census tracts and to rural areas. Given that USPS has 31,000 branches, urban areas bordering on higher-income ones would still be served and in the heart of the community, enhancing commercial development surrounding a now-thriving post office.
As noted, the old U.S. Post Office financial operation was forced to close in 1967 due to repeated bouts of crushing interest-rate risk. Floating rates mandated in the Gillibrand bill attempt to solve for this, but credit risk associated with changing interest rates remains a significant hazard. USPS loans would all have variable rates that could quickly become unaffordable to vulnerable borrowers. Payday lenders handle this with very short maturities, but nothing in the Gillibrand bill defines what types of loans the USPS could offer. Risk-mitigation provisions should be baked into the statute even if these cut into the ambitions Gillibrand and others have for a payday replacement via the Post Office.
And, even if risk features well known in small-dollar finance are addressed in the statutory design, the USPS will still be exposed to the underlying fact that lower-income households are higher-risk customers. Ordinarily, one would say that the cost of realized risk would come from USPS profits, but there aren’t any. One way to go here is instead to build out the partnership idea included in the Gillibrand legislation.
Using partnerships, a postal-service financial operation could be more than essentially a remote deposit-taking and loan-disbursement center. As a trusted, secure location, it is ideally suited for this and, operating as a front office for partner banks, the USPS takes none of the risk associated with changing interest rates, unpaid loans, fraudulent deposits, and the like. Theoretically, the bank would make the profit from these transactions after modest, at-cost compensation to USPS.
Theory is not, though, practice. The logistics of this arrangement are formidable – for example, who handles the due-diligence associated with opening accounts and making loans – due diligence necessary even for small-dollar transactions given the formidable capability of structuring transactions by astute money launderers? Is there enough money in small-dollar banking that, even if facility costs are sharply reduced, banks would want to partner with the USPS? If so, are these profits volume based and thus viable only for a very big bank? The latter is likely to be true, making the politics of USPS partnerships particularly problematic.
As this brief analysis shows, my enthusiasm for the Gillibrand legislation is for the idea, not the draft. The legislation needs a lot of practical fixes before initial enthusiasm can be converted into meaningful support. More work is thus needed before one can reasonably say whether the USPS as a financial center would be functional, desirable, and achievable.
Still, there is clear need for some type of utility to meet the needs of the un- and under-banked households that are most unlikely to be safely and affordably met by private-sector financial institutions. Years ago, Congress authorized “bankers’ banks” to handle the big-ticket needs that community banks could not handle on a stand-alone basis. Would a bankers’ bank dedicated to low-income financial access do the job? Competitive, regional, and other challenges need careful consideration, but along with more work on the post office, a bankers’ bank for equality finance warrants close attention. It might even be viable under current law, which would bring it to life far faster and in considerably better alignment with the profit incentives essential to increased equality finance.