Moneybox

Kirsten Gillibrand Unveils Her Ambitious Plan to Turn the Post Office Into a Bank

Your next bank?
Your next bank?
Reuters/Shannon Stapleton

Add New York Senator Kirsten Gillibrand to the list of big name Democrats who want the U.S. Postal Service to double as a bank. The potential 2020 contender is rolling out legislation today that would require post offices to offer their customers basic financial services, such as checking and savings accounts and small, short-term loans, that many Americans currently can’t access affordably. While the idea of postal banking has been backed by progressives like Elizabeth Warren of Massachusetts and Bernie Sanders of Vermont—both likely presidential candidates—Gillibrand’s bill gives an important policy objective a high-profile, useful boost.

Postal banking is a pretty straightforward solution to a nagging problem: Today, too many Americans are cut off from run-of-the-mill financial services. As of 2015, 7 percent of households were unbanked (meaning, they had no bank account at all) and another 19.9 percent were underbanked (meaning they had to rely on expensive and often predatory alternative options like payday lenders or check cashers to deal with their money needs). Some people who lack any kind of account say they simply don’t trust banks; others complain that fees are too high, they don’t have enough money to deposit, or that there aren’t convenient branches. Having a familiar local post offices provide checking accounts that don’t require a minimum balance, debit cards, and other services would be an easy fix that could save Americans a great deal of money. A Postal Services Inspector General report exploring the idea pointed out that, in 2011, the average underbanked American spent $2,412 getting financial services. That’s a lot of money needlessly flowing to companies like ACE Cash Express.

Postal banking is also already common in the rest of the world. Today, according to the United Nations’ Universal Postal Union, 183 national postal services offer at least one financial service and 87 of them provide checking or savings accounts, which today cover about 1 billion customers. Britain has postal banking. New Zealand has postal banking. Japan and China have postal banking. You get the idea.

The United States, on the other hand, used to have postal banking. The postal savings system began under the Taft administration, and became popular with poorer and immigrant families, especially after bank runs during the Great Depression wiped out Americans’ savings and their faith in traditional financial institutions. But postal savings fell out favor mid century, in part because interest rates on accounts were capped below the rates offered by consumer banks, which had become safer thanks to the advent of federal deposit insurance. Eventually, the Johnson administration killed off the system entirely. In retrospect, that looks like it was a mistake. Consumer banks have generally done a poor job serving lower-income customers, either hitting them with excessive fees, or ignoring them entirely because their business just isn’t just valuable. Non-profit credit unions, though they theoretically have a community mission, aren’t a whole lot better these days.

If Democrats do try to bring back postal banking, there are two main ways to do it. First, would be the basic approach: The post office could simply offer low-dollar checking accounts and debit cards, to make sure every American has affordable access to the absolute essentials of financial services. That would be a relief to the millions of households with no bank account today, and might not even be that much of a political lift—after all, the Postal Service would be catering to customers that Bank of America and Wells Fargo seem mostly uninterested in these days. This approach wouldn’t dramatically change the face of American finance; it would assist the unbanked, but less so the much larger group of underbanked.

The more ambitious approach, which Gillibrand and other Democrats have embraced, would be far more seismic. Gillibrand’s bill would allow the postal service to also make small loans at low interest rates and would almost certainly compete payday lenders out of business. The bill states that postal banks could make loans of up to $500 at a time at interest rates in line with the yield on month Treasury bills, which today is sitting at a low 1.65 percent. That rate of interest is probably too low given how many of these loans will likely default. The Postal Service’s Inspector General report pictured interest rates closer to 25 percent, which would still save customers hundreds of dollars compared to payday loans that commonly come with APRs around 400 percent. But while Gillibrand’s lending proposal may not be entirely realistic in its current form, it is a powerful statement of intent. “They see this as a shot across the bow,” University of Georgia Law Professor Mehrsa Baradaran, who helped advise on the bill, told me. “What Gillibrand wants most is to undercut payday lenders.”

That will be a much harder battle to win than simply giving more American access to free checking. The payday lending industry is a powerful lobbying force in Washington that has been able to rally support from some Democrats in the past, and the party’s moderates may be disinclined to simply drive the industry out of business. It will also be harder for progressives to argue that the U.S. is simply playing catch-up with the rest of the world; according to the Universal Postal Union, only a handful of postal banks actually offer loans. That doesn’t mean senators like Gillibrand should curb their ambitions and ask for half a loaf. It just means that, even by global standards, they’re setting an ambitious goal.