A recent white paper by the U.S. Postal Services Office of the Inspector General floated the idea of introducing postal banking services as a means of expanding financial inclusion. Not surprisingly, the banking industry has rushed to condemn the ideawhich would create new competition for financial servicesas sort of creeping socialism. But when one considers postal banking more carefully, the idea isnt so crazy, although it raises a number of real questions and challenges.
First, the idea of a postal bank is not new to the United States. The USPS successfully operated a postal savings bank from 1911 to 1967. The system was designed as the Republican (!) alternative to federal deposit insurance. The Postal Savings Bank was constrained by its statutory limitations to offering only passbook savings, but in World War II the Postal Savings Bank pioneered new ideas and technologies to help service members, such as deposit by mail.
Put another way, weve done postal banking successfully before, without the world collapsing.
Looking globally, the United States is very much the outlier in not having a postal banking option. Most developed countries (and many developing countries) offer some form of postal banking. Theres a great deal of variation in the services postal banks around the world offer, ranging from payments, like the successful giro system in Europe, to mortgages in Switzerland. Nor are postal banks always niche playersthe Japanese postal bank is one of the largest financial institutions in that country. Postal banking hasnt been a disaster elsewhere.
Obviously the fact that postal banking is not new or unique does not tell us whether it is a good idea. The answer to that question depends on what kind of postal banking system we would have and why.
To the extent that postal banking is meant to plug the budgetary hole in the USPS, it is not particularly appealing. It is questionable how well the USPS could succeed in a head-to-head competition for mainstream financial services. One the one hand, it has the advantage of the best retail branch network of any business in the country, with post offices in every ZIP code; customer familiarity; and an existing cash handling system. But thats not the same as operating a full-service bank.
More importantly, if the postal bank would serve primarily low-income consumers, as the Inspector Generals report suggests, can the USPS turn a profit while offering simple, transparent, and low-cost products? Fair financial inclusion might be at odds with revenue goals, and USPS profitability should not be based on exploiting financially vulnerable populations.
To the extent that postal banking is meant to address the problems of the unbanked and underbanked, however, it has a lot to commend it. The post offices accessible branch network may offer advantages in reaching these consumers, many of whom do not feel comfortabledealing with the more formal feel of traditional financial institutions. Moreover, one could imagine a postal bank as a feeder service that brings unbanked consumers into the mainstream financial system and then graduates them to private institutions. That was how the Postal Savings Bank worked; its clientele was overwhelmingly low-income earners and immigrants, and the $2,000 cap on postal savings accounts meant that as consumers became successful, they would have to graduate to the private banking system.
What one thinks about a postal banking system also depends on the services offered. Most controversial would be provision of credit. There are legitimate concerns about offering government-backed small-dollar loans or other forms of consumer credit through a postal bank. The taxpayer would bear the risk of losses and underwriting might be politicized. Of course, as the experience of 2008 shows, the taxpayer already bears the risk of poor consumer credit underwriting by private banks, and we already have the government assuming credit risk on everything from home mortgages (through Fannie Mae, Freddie Mac, and the Federal Housing Administration) to commercial loans (via the Small Business Administration). Is there any reason unsecured, small-dollar consumer credit should be treated as different?
Why, then, the objections from the banking industry? Well, no business wants competition, particularly competition that might be unfairly advantaged. On the other hand, if a postal bank were truly limited to serving the unbanked, it is hard to see how it would directly compete with private banks. Instead, it would be picking up the customers that the private banking industry does not serve because they are unprofitable. A postal banks services might ultimately expand, but that is neither inevitable nor a sufficient reason to object to a limited postal bank. Perhaps, then, the concern is that if a postal bank offered simple, transparently priced, low-cost services, that might start to shape consumer expectations for the whole financial services industry.
At the very least, one could imagine a postal bank offering some sort of limited transaction accounts with associated debit cards and bill-pay services as a valuable service to unbanked and underbanked consumers. Such a product would compete with private prepaid cards and mobile banking solutions, but might offer a more transparent, low-cost, plain vanilla alternative that would anchor the market and force competitors to offer consumers superior value propositions. It is hard to make low-income consumerslike many of the unbanked and underbankedinto profitable financial services customers. That is one reason why so many are unbanked.
This points to a real tension in any sort of postal banking proposal: to the extent that a postal banking system is designed to provide low-cost services to consumers, it is potentially at odds with the USPSs need to find new revenue sources. Put another way, is the mission of a postal bank profit or financial inclusion?
Perhaps both can be achieved at the same time, but that is the challenge. If we can resolve it, postal banking doesnt seem so crazy after all.
Adam J. Levitin is a professor of law at Georgetown University.
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