There’s no denying that a good-sized chunk of the United States populace has no access to traditional banking services.
Between rising fees on low balances and surprisingly stiff penalties for occasional missteps like an overdraft, the nation’s most prolific banking names like U.S. Bank (USB) and Wells Fargo (WFC) have driven a bunch of their small-account customers away. For perspective, some researchers say that 28% of people living in the U.S. don’t have access to basic banking services like checking accounts or savings accounts.
But where did these customers go? It depends. Some of them have found they could meet all their money needs at Walmart (WMT). Many of the mega-retailer’s stores provide a combination of direct deposit, pre-paid debit cards, and cash disbursement services that they effectively serve as a bank, even if it isn’t regulated like a bank.
Other low-asset and lower-income consumers take care of their quick cash needs through so-called payday lenders like Cash America International (CSH) or pawn lenders like EZCORP (EZPW). If the United States Post Office’s Inspector General has anything to say about it, though, the next time you buy a book of stamps you could also walk away with a fistful of dollars from short-term payday loans.
That’s right — the USPS wants to help unbanked and underbanked consumers better manage their money by providing services they don’t have access to in their locale, or can’t get in their unique financial situation.
The Plan Looks Good on Paper
The premise was put forth in a white paper published by the USPS Office of the Inspector General in late January. In the 33-page explanation, the USPS-OIG noted the 34 million U.S. households that are considered underserved by traditional banking institutions spend approximately $2400 per year paying for short-term loans, cash-checking services, and the like, implying this market is worth more than $80 billion in annual revenue.
The proposal suggested that, rather than charging those families fees that reach such “predatory” levels, the USPS could more affordably meet that need for consumers and in so doing could shore up the Post Office’s habitual losses. All told, by using the postal service’s widespread (and evenly spread) physical locations all over the nation — including in neighborhoods where banks are tough to find — the USPS feels it could generate $9 billion in new yearly revenue.
On paper it seems like a brilliant idea … affordable banking-like services and payday loans for those who need them and can’t get them, and a new source of income for the government’s struggling delivery agency. There’s just one problem with the premise — it’s never going to work, and it might even cost the USPS money, for three reasons. In no particular order…
1. Contrary to popular belief, the business of payday loans isn’t wildly profitable.
Yes, the annualized loan interest rates of 300% are steep, but bear in mind that the small-sized payday loans the USPS is talking about making still means very insignificant total interest charges.
In the white paper’s comparison example, it was pointed out that a fairly typical $375 loan via a payday lender — a loan with a lifespan of 5 months — would cost a borrower $520 in interest and fees. The USPS suggested it would only charge that borrower $48 in fees and interest for the same $375 loan.
The problem is, it’s not like the bulk of that $520 in fees and interest is banked as a profit for the lender of those payday loans. The overhead (personnel, rent, advertising, and perhaps most of all, bad loans and the subsequent write-offs) of running a short-term lending service may well exceed the $48 the USPS is talking about earning for a $375 cash loan.
2. Adding financial services to the list of things the USPS does errantly presumes current and future postal station workers will have the knowledge, desire, and willingness to add to their burden.
While it’s true that mail deliveries are still declining, it’s also true that the United States Postal Service has largely matched that decline with a reduction in its workforce for the past few years. So, it’s not like the workload on a per-employee basis has become light for Post Office desk workers over the years.
To ask them to handle payday loans and other financial services — which requires more attention — while postal customers are lining up may push these employees past their tipping point. And heaven help the worker who has to deal with an angry or difficult cash loan customer.
3. Legally and structurally, the idea is complicated to the point of being impossible.
The Post Office has no intention of becoming a bank, nor does it need to in order to perform basic services like check cashing or money orders. If it aims to dive deeper into card-based money storage or payday loans, however, it will need at least one financial partner to be the middleman.
While many have assumed banks would be lining up to take on that role, remember, these are the customers banks didn’t want. In fact, mainstream banks like U.S. Bank and Wells Fargo recently nixed plans to get into the high-interest short-term loan business specifically to avoid pending legislation.
Would these be more desirable customers if the USPS packaged them up and aggregated their assets — and their risks — into one chunk? Possibly. Many large banks already quietly offer financial backing for lenders of payday loans, as it’s a very profitable business to be in.
If the United States Post Office dives into the game, however, the visibility of the venture will require a heck of a lot more transparency and accountability. See, someone in the mix eventually has to carry the risk of bad debt on their books, and if a big bank does it, shareholders could balk … particularly if the venture isn’t earning predatory-level interest rates.
But what if the USPS forgoes a bank partner and carries all the risks on its books? Then ultimately the taxpayers are on the hook, and for a fiscal train wreck like the United States Post Office, that’s never going to be allowed to happen.
Kudos to the USPS for thinking creatively in its time of need. But, complicating the business of parcel and post delivery be tiptoeing into unfamiliar waters isn’t the way to do it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.