Last week, the office of the United States Postal Service inspector general released a white paper touting a “huge market” represented by the population of Americans that is underserved by traditional banks and non-bank financial providers.
The proposal is strongly supported by Senator Elizabeth Warren (D-MA), the former college professor turned public policy expert. Warren is a modern-day Calvinist who is personally responsible for cutting off millions of Americans from private mortgage credit via the 2010 Dodd-Frank Wall Street Reform law.
Mehrsa Baradaran, an assistant professor of law at the University of Georgia, specializing in banking regulation, also supports the idea of a “Postal Bank” and wrote in The New York Times:
The U.S.P.S. — which already handles money orders for customers — envisions offering reloadable prepaid debit cards, mobile transactions, domestic and international money transfers, a Bitcoin exchange, and most significantly, small loans. It could offer credit at lower rates than fringe lenders do by taking advantage of economies of scale.
Well, not really. First, there are no economies of scale in banking and consumer credit, period. Anyone who actually works in banking knows this. Second, the idea of the U.S.P.S. getting into financial services belongs in the same silly bucket as Ellen Brown’s Public Banking Institute, where states sponsor public banks using taxpayer funds as capital. We discussed this popular idiocy in an earlier comment, “Washington & Wall Street: Income Inequality Starts with Inflation and Public Debt.”
The logic of liberals such as Senator Warren and Ellen Brown goes something like this: First, completely cripple the private banking system with oppressive regulations. Second, bring in the government to solve the problem created by step one. This approach to regulating private sector industries is not really about helping people, as Warren and her ilk like to pretend, but rather is a way of entrenching government (and the liberals who derive economic sustenance thereby) in all aspects of our lives.
The truth of the matter is that providing retail banking services to the “underserved” is a loss leader for most banks and non-banks. The reason why such a large portion of the U.S. population is not served by traditional financial institutions is that retail banking in general is not really profitable. You will get no argument from me that payday lending is predatory, but is displacing this private lending industry with the U.S.P.S. really a good idea?
We need to recall that 20 years ago, a group of government-sponsored enterprises known as commercial banks rolled-up the non-bank consumer finance sector. Names such as Household Finance, the Money Store, and many other non-banks which once provided services to low-income consumers were acquired by large commercial banks and with disastrous results. Other subprime lending sectors such as auto finance still remain quite robust, however, and provide a better model for providing credit to low income consumers than does the federal government.
The report published by the U.S.P.S. claims that providing financial services via Postal offices could generate $9 billion annually in revenue for the money loosing agency but does not talk about profitability. The truth of the matter is that whether you are talking about Postal Banking supported by the federal government or Public Banks sponsored by the states, the economic model is likely to be a loss leader. There is no free lunch, as the old saying goes. A public bank with bureaucrats minding the cash drawer are at least as likely to lose money on lending as a bank owned by private investors deploying FDIC insured deposits.
Keep in mind that the U.S.P.S. is proposing to charge consumers interest rates in the mid-20 percent range for loans to our poorest citizens, a rate that is far lower than the usurious rates charged by payday lenders–but well below the level needed to really cover the risk of these loans in an economic sense. The average default rate for credit card loans by all US banks is a little over 3% annually, but the probability of default on a portfolio of payday loans is closer to 50%. Skiba and Tobacman (2007) note in a paper for the FDIC.
First, over half of payday borrowers default on a payday loan within one year of their first loans. Second, defaulting borrowers have on average already repaid or serviced five payday loans, making interest payments of 90% of their original loan’s principal.
Getting the U.S.P.S. into this segment of the consumer lending market seems like a recipe for disaster, not a way to enhance the agency’s profits. The proposal also suggests using the U.S. Treasury to collect on bad loans from the poor by withholding tax refunds. Am I the only one who thinks this is a really bad idea?
Not surprisingly, most trade groups in the financial services world have rejected the idea of Postal Banking. “You wouldn’t have a FedEx and UPS had the Postal Service been a model of efficiency and service, so you want to unleash that failed model on the financial system?” said Cam Fine, CEO of the Independent Community Bankers of America. “It’s the worst idea since the Ford Edsel.” Representatives of the banking and credit union sectors likewise reject the idea of Postal Banking.
But to be fair to the U.S.P.S., the solution to the agency’s fiscal problems is for Congress to stop interfering with the operations of the Post Office. If members of Congress from both parties would allow the agency to rationalize its operations and focus on those areas of true need for US consumers, then the losses that have motivated the idea of Postal Banking would disappear. The solution to meeting the financial needs of our poorest citizens is to have reasonable regulations of products like check cashing and consumer lending, not to insert the government into what is a difficult and very risky business.