Why the Post Office needs to compete with banks

By Felix Salmon
February 3, 2014
I said that “the only way to save the Post Office will be to allow it to move into financial services”, seeing as how “banks in the US are mistrusted and disliked and many people would love to be able to just bank at the Post Office instead”.

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Back in 2011, I said that “the only way to save the Post Office will be to allow it to move into financial services”, seeing as how “banks in the US are mistrusted and disliked and many people would love to be able to just bank at the Post Office instead”.

That’s still true, and has been given a lot more salience since the Post’s Office inspector general released a 33-page white paper, last week, saying that the Post Office should move into what it calls, in its headline, “Non-Bank Financial Services for the Underserved”.

The report has been warmly greeted by Elizabeth Warren, on its own terms:

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.

Warren also, however, praises David Dayen’s article about the white paper, which has an unambiguous headline: “The Post Office Should Just Become a Bank”. And Adam Levitin, who used to be Warren’s co-blogger at Credit Slips, also uses the paper to push the idea of postal banking.

So let’s be clear: there’s a very important difference between postal banking, on the one hand, and what the inspector general is proposing, on the other. And while postal banking is a good idea, the non-bank proposal from the inspector general is simply not going to fly.

Indeed, it’s rather worrying and disconcerting — not to mention disingenuous — that the inspector general goes out of its way to say that the Post Office should be a non-bank, rather than a bank:

The Postal Service is well positioned to provide non-bank financial services to those whose needs are not being met by the traditional financial sector. It could accomplish this largely by partnering with banks, who also could lend expertise as the Postal Service structures new offerings. The Office of Inspector General is not suggesting that the Postal Service become a bank or openly compete with banks. To the contrary, we are suggesting that the Postal Service could greatly complement banks’ offerings.

This is a bit weird, since the centerpiece of the inspector general’s proposal, the Postal Card, seems to do nearly all of the things that a bank account does:

 

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The inspector general, it seems, wants the Post Office to partner with a real bank, which would ensure that the funds on the Postal Card were FDIC insured: such a setup would be similar to the way in which Simple (which is technically a non-bank) partners with Bancorp for such things. But this is nit-picking, really: Simple explicitly sells itself as a bank replacement, and the Postal Card does pretty much everything that Simple does, plus — crucially — loans. (Which are the one big banking service Simple doesn’t offer right now.)

The inspector general — along with Elizabeth Warren — is at great pains to point out how useful the Postal Card would be to the “underserved” — that is, the millions of Americans without bank accounts. And they’re absolutely right about that: 38% of post offices are in ZIP codes with zero bank branches, and so such a card would bring banking services to lots of people who have no easy access to them right now.

But if the Postal Card is as attractive as the inspector general paints it, then why shouldn’t it also appeal to people who do have bank accounts? After all, the white paper explicitly says that the Post Office should offer “a diverse suite of financial services”: this is a much broader proposal than the basic savings account, capped at $2,500, which the Post Office offered between 1911 and 1967. And while it might well make sense to farm out back-end services to a bank rather than making the Post Office a bank itself, the fact remains that the Post Office would still be competing with banks. (Which explains why the banks are so opposed to the idea.)

If the Post Office was hobbled so that it would compete only with payday lenders and not with banks, then the whole Inspector General plan is, I’m sad to say, a non-starter — for exactly the same reasons why the Church of England can’t play a similar role in the UK. Non-banks compete on convenience, not on cost, and tend to be open very long hours; while the Post Office has the advantage that a lot of the underserved go there anyway, it’s still going to have real difficulty competing with Western Union, check-cashing stores, and all the other high-cost non-bank financial-services shops which do exist in the ZIP codes without banks.

In order to make a postal bank work, it needs to be a postal bank: it has to be able to take market share away from existing banks. That in turn means that the existing banks will fight tooth and nail to prevent such a thing from ever seeing the light of day.

The charitable view of the Inspector General’s report is that it’s essentially pushing a Trojan horse: that it will try to set the Post Office as a “non-bank”, on the grounds that doing so will help the underserved and not really compete with banks. That’s the only way Congress would ever allow such a thing to happen. But once the Postal Card is up and running, nothing’s going to stop the Post Office from competing directly with every bank in the country.

But if the Post Office is hobbled from day one in such a way as to prevent it from competing with banks, then the Inspector General’s idea is never going to work.

7 comments

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Looks more like an eWallet than a bank account to me…

Posted by FifthDecade | Report as abusive

This banker is intrigued! Some questions Felix… My mutual bank has been around since the civil war and has never accepted a bailout. In that 150 year period we have scraped together a 130million dollars in capital. If the post office is to make loans where would its initial capital come from? An appropriation from congress?

Next lets ask how the postal bank you envision will succeed where 99.9% of existing banks (even my little Maine mutual or your cuddly credit union) fail… serving the poor. As you and most of your readers well know, in traditional banks the top 20% of customers heavily subsidize the cost of serving the poor and lower middle class. Unless you expect the rich and the affluent to start banking at the post office, who will pay the costs of serving the poor? Remember this is suppose to lift the dying institution out of the grave not nail the coffin shut right?

As a post script though I don’t see how it could possibly work, this banker is all for it… I say open the Postal Bank immediately! Payday lenders and 18%+ credit cards are a scourge giving all lenders a bad name. If Uncle Sam wants to get into the banking business bring him on. If we have to play by even remotely the same set of rules I don’t think I have anything to worry about.

Posted by y2kurtus | Report as abusive

Felix, you seem to assume that those 38% of ZIP codes are poor urban areas that have post offices and non-bank financial services but no bank branches. I’d bet dollars to doughnuts that very few of them fall into that category – even a poor urban ZIP code has at least 1 bank branch, just not a lot of bank branches – and that most of them are small towns with limited commercial buildings of any type. The post office is only there because a Congressman kept if open. Those ZIP codes would closely correlate with the least populated ZIP codes in the U.S.

Posted by realist50 | Report as abusive

* kept it open

Posted by realist50 | Report as abusive

The Post Office could survive and thrive in the financial space outlined above but it won’t. The downfall is the burdensome rules and processes it must adhere to and the attitude of its workforce to adapt to changes. The great ideas presented by the IG must be packaged with sweeping changes on how the post office finds, tests and implements new products and services. Internally, groups need to be aligned to support testing new ideas. Change the current methodology used to determine labor costs at a post office counter. The skewed cost structure makes new products look unprofitable while other retailers thrive on the cost structure. The IG’s great ideas are like putting the cart before the horse. The cart will go nowhere until a viable horse is hitched to the front.

Posted by FarmerT | Report as abusive

The ONLY reason a government agency will give you money is to buy your vote.

If we really need a profitable business to keep the Post Office afloat, how about selling pot? Nope, not kidding — many states have a monopoly on liquor stores and there once was a Constitutional Amendment against consuming that.

Posted by TomMariner | Report as abusive

By the same token, the Postal Service should have been at the vanguard of email (specifically), but in providing Internet services as a ‘common good’.

Who wouldn’t have paid…say…$5/month for Internet access back in the mid-90s? And every post office could have been a digital hub.

C’est la vie.

Posted by josfrick71 | Report as abusive