Two Types of Postal Banking

Should the U.S. Postal Service get into the banking business? U.S. Senators Kirsten Gillibrand (D-N.Y.) and Bernie Sanders believe it should, and have introduced the Postal Banking Act. The idea is that with 8.4 million unbanked American households, banks are doing a bad job of serving low-income people. If the U.S. Postal Service (USPS) began offering banking services, it may be able to reach these people.

Lawrence White and Diego Zulugua have criticized the idea of the USPS entering the banking business. But I want to take a different approach with this article. Let’s assume that the advocates of postal banking are right. Banks are failing to reach many American families. And let’s also agree that getting an agency like the USPS involved could help solve the problem.  

Even if we accept Gillibrand and Sanders’s premises, we can still disagree with their vision for postal banking. That’s because there are actually two ways to implement postal banking. The version that most advocates envision involves upgrading the USPS’s 30,000+ offices to offer in-branch banking services. But a less-discussed option is to provide a product that doesn’t rely on branches at all: a USPS prepaid debit card. I’m going to argue in favour of the second option.

Senators Gilliband and Sanders want the USPS’s 30,000+ offices to offer checking accounts, savings accounts, small dollar loans, debit cards, ATMs, check-cashing services, and bill payment. Consider what this would involve. All 30,000+ offices would have to be kitted out with new hardware and banking software. ATMs would have to be installed. Employees would have to become proficient not only in mail handling, but also the business of banking. More front-line workers would have to be hired to provide banking services.

The regulatory burden would increase too. USPS currently sells money orders, and so its employees are trained in basic anti-money laundering (AML) prevention. But bank-level AML is stricter, and so the USPS’s entire workforce would have to be retrained.

A USPS prepaid debit card may be a better option.    

A common reason for implementing postal banking is to solve the “banking desert” problem. That is, people often live in ZIP codes without bank branches, and that may explain why they are unbanked. Mobilizing the USPS’s 30,000+ branches seems like it would be a great way to solve this problem.

But the banking desert problem is a myth, a point highlighted in a recent article by Diego Zuluaga. In the 2017 National Survey of Unbanked and Underbanked Households, the Federal Deposit Insurance Corporation (FDIC) finds that only 9.2% of the unbanked cite “inconvenient locations” as a reason for their status. Meanwhile, 52.7% cite lacking enough money to keep in an account while 30.2% say they do not trust banks. Indeed, New York City has a higher unbanked rate than the national average despite lacking even a single banking desert.

But if the USPS’s 30,000+ convenient locations aren’t a key ingredient for reaching the unbanked, why spend so much money activating and maintaining a physical postal banking network? 

The USPS’s prepaid debit card would do almost everything that a regular checking account does, but without branches. It would have an optional high-yielding savings account attached to it. A website and mobile app would allow online access.

USPS cards would be sold in grocery stores, pharmacies, and post offices all across the country. Customers could also visit the USPS’s website to order a card by mail. To comply with anti-money laundering rules, the USPS card could only be activated by visiting the USPS’s website and entering one’s personal information. If they lack internet access, card users could register cards in USPS stores.

Cards could be loaded with money by depositing cash at any grocery store, post office, or pharmacy. Funds could also be transferred onto the card from PayPal, a bank account, or any other reloadable prepaid card. The card could be configured to receive salary and benefits, pay bills, and route funds to friends and family. Purchases could be made wherever Visa or Mastercard are accepted.

There would be no need to install ATMs at each postal outlet. The USPS could negotiate with Bank of America or Chase or both to ensure its customers have access to a vast ATM network and get 1 or 2 free monthly withdrawals.

As for check cashing, the USPS already offers a government check-cashing service. If third-party check-cashing is deemed important, the USPS card app could be configured to take a picture of a check, and the funds would be deposited onto the card free of charge.

Finally, a USPS debit card could also be configured for small loans. Card owners would apply for up to $1,000 in credit, say via the USPS’s website. If they qualify, the money would be deposited onto their USPS debit card. No need for the USPS’s many front-line employees to become experts at processing loans. In a recent article, James McAndrews suggests a way to configure a prepaid card-linked lending program. 

By centralizing the USPS’s entire banking platform on the web and distributing debit cards via retailers, the USPS would be able to offer banking services at a lower cost than if it relied on its physical branches. No investment would have to be made upgrading hardware or software at the USPS’s 30,000+ outlets. USPS employees would not have to be retrained in banking AML, nor would they have to become fluent in providing both postal and banking services.

Lower costs mean that the USPS could provide the unbanked with what they really want: a nonbank product with low fees and no minimum account balances. After all, three of the top four reasons for not having a bank account are “do not have enough money,” “don’t trust banks,”, and “account fees are too high,” according to the FDIC.

Is it a problem that a USPS prepaid card approach would mean no in-person service? For some, yes. But as we move further into the 2020s, people are getting ever more comfortable banking without requiring face-to-face contact. Apps, ATMs, and help lines suffice. The sorts of transactions that in-branch outlets continue to excel at are paper-based, like checks and money orders. But these are dying payment media. The number of check payments in the United States declined at an annual rate of 7.2% a year from 2015 to 2018. The USPS processed 60 million money orders per month back in 2001. Now, it processes less than 20 million.

Why does the USPS need to be involved at all in reaching the unbanked if a brick & mortar branch network isn’t important? It doesn’t. Any government agency could probably fill the role. In fact, the U.S. Treasury is already a major provider of a limited range of banking services via its Direct Express prepaid debit card. Rather than starting a new government debit card program from scratch, building off of and improving the Direct Express card would probably make more sense.

On the other hand, USPS is a well-known brand. A prepaid card with the USPS logo on it would probably better stand out on a card rack than the Treasury’s brand. But that’s more of an argument for co-branding than developing a new program from scratch.

There are other well-known brands already active in the prepaid debit card market. These include the likes of Walmart (via MoneyCard), Green Dot, Visa/MasterCard (via Vanilla cards), and American Express (via Bluebird cards). These card providers are certainly reaching low-income Americans. According to the Federal Reserve, only 93.2% of US households had bank accounts in 2016. But when prepaid cards are included, 98% have access to electronic payment services.

It is possible that these prepaid card providers aren’t competing very hard, and thus unbanked households face abnormally high fees. If so, the unbanked population could benefit by having the USPS enter the market.

On the other hand, if the market for prepaid cards is already competitive, a USPS card may have problems gaining a foothold, in which case it may not even be worth the effort.

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