From 1911 through 1967, the old U.S. Post Office offered savings accounts. The enterprise started because private banks seldom insured deposits. The establishment of the Federal Deposit Insurance Corporation in 1933 removed the raison d’être for postal banking. By the time Congress ended it, deposits had dwindled, as the public greatly preferred private banking.
In recent years, postal banking has been floated again on Capitol Hill. Michael Lind of the New America Foundation revived the idea in 2008 in the pages of the New York Times.
[T]he structure of public and private finance in the United States chronically fails to address four problems: the almost 10 percent of Americans without a bank account; the concerns of all Americans about the security of their savings; the growing indebtedness of the country to foreign governments and financial institutions; and underinvestment in public assets like sewer systems and bridges. These four problems may seem unrelated. But they can be addressed in the United States, as they have been in similar countries, by a single institution that is at once new and old: the postal savings bank.
Lind’s big proposal initially got little traction beyond the liberal intelligentsia. Postal banking reappeared in January 2014 when the U.S. Postal Service inspector general’s office issued a report. The IG’s more modest proposal urged USPS to offer “non-banking financial services” tailored to the needs of the “unbanked” and “underbanked.” These are the “millions of Americans” who “do not have a bank account, or use costly services like payday loans and check cashing exchanges just to make ends meet.”
Left-leaning publications like the New Republic and Salon love the idea, and the IG’s report made a splash on Capitol Hill. It dangled the prospect of government profit with a social purpose in a policy twofer: shore up the financially foundering USPS and save the poor from predatory lenders. A second IG report released last month further presses the case for postal banking.
To date, no legislation has been introduced in Congress, and there are healthy grounds for skepticism. Contentious and unanswered policy questions abound. These include what financial services the USPS would offer; what interest rates it could and would charge; whether postal union employees would do the work; and, perhaps most crucially, if the USPS failed at banking, would it be bailed out by the taxpayers?
But these issues pale in comparison with a more fundamental objection: that postal banking is not a solution. It will not improve the USPS’s financial condition. Nor does there appear to be much demand for such services.
The “financially underserved market” is $103 billion per year, according to the Center for Financial Services Innovation. Of that, just $13.7 billion is reaped by the much-loathed payday lenders and pawn shops. The rest of the expenditures go to other purposes, like auto loans and subprime credit cards. The IG estimates the USPS could see $382 million in revenue from check-cashing. A nice 20 percent profit on those transactions would earn the agency $76 million annually. That’s not nearly enough to save the USPS, which last month booked a second-quarter loss of $1.5 billion and is $15 billion in debt.
Some casual readers of the IG’s initial report seized on its mention of 68 million “underserved adults.” This number includes both the wholly unbanked and anyone who “used at least one nonbank financial service during the past year,” like check-cashing services. Only about 7.7 percent of households—16.7 million adults—are wholly unbanked and unserved by private banks, according to a 2013 FDIC survey.
Of those 16.7 million people, 18.6 percent said they are unbanked because they do not trust or like banks or have privacy concerns. Another 49 percent said they were unbanked because they do not have enough money or because bank fees are too high, and 2.6 percent thought banks had inconvenient hours. These individuals are apparently unaware of online banks that offer no-fee savings and checking accounts. Customers can deposit checks by smartphone app 24 hours a day, and deposits are FDIC-insured. Thus, 70.2 percent—11.7 million individuals—are unbanked by choice or from mistaken notions.
That leaves 5 million adults who might be underserved by the private banking sector. And that number may wildly overstate matters. FDIC found only 1.2 percent of the unbanked—200,000 people—blamed their plight on banks’ failure to offer desirable products and services.
Those seeking a quick fix to the postal service’s many problems would do well to look elsewhere. Postal banking is less a solution than a bad penny.
Kevin R. Kosar is the director of the Governance Project at the R Street Institute, a free-market think tank.