Kevin Drum Doesn’t Like Postal Banking: A Reply

I see Kevin Drum is unhappy about my endorsement of postal banking as a way to address the Postal Services financial problems. Kevin correctly points out that the Inspector General’s (IG) argument for postal banking didn’t involve conventional savings and checking accounts, but rather more narrow financial services:

“1) payment mechanisms (i.e., electronic money orders), (2) products to encourage savings, and (3) reloadable prepaid cards. The first is fine, but not really ‘postal banking.’ The second is problematic since even the IG concedes that the reason poor people tend not to save is ‘largely due to a lack of disposable income among the underserved.’ That’s quite an understatement, and it’s not clear what unique incentives the postal service can offer to encourage savings among people who have no money to save. That leaves prepaid cards—and maybe a good, basic prepaid card sponsored by the federal government is a worthwhile idea. But that’s really all we have here.”

Let’s start with these items. The revenues from payment mechanisms and reloadable prepaid cards run into the tens of billions of dollars a year. Much of this comes directly from the government, which now uses a substantial portion of the budget for food stamps and other government transfer programs to pay banks to provide beneficiaries with cards. The Postal Service could almost certainly do this at a lower cost.

More importantly, many low and moderate income people get ripped off by paying exorbitant fees to check cashing services and other intermediaries to get access to their money or to send it to a third party. While the fact that these people may save large amounts of money by using a postal bank, which they might use because they trust the post office, draws a “meh” from Kevin, that sounds like a pretty good thing to me. Imagine paying 50 cents or a dollar to have your $200 pay check cashed instead of the ten dollars that a check cashing service might charge.

Kevin’s right that the biggest obstacle to savings for low and moderate income people is a lack of money. But the fact is that when they do save, they often pay excessive fees to intermediaries. This is a widely recognized problem and there is bipartisan support for creating some sort of low cost saving vehicle that low and moderate income people could use. That doesn’t mean that everyone would say the Postal Service should be the venue for this savings, but there seems no reason to rule it out apriori as a candidate.

Then Kevin gets to the issue of small scale lending:

“Finally, there’s the prospect of providing very small loans. But as much as we all loathe payday lenders, there’s a reason they charge such high rates: they also have high rates of default. The postal service can charge less only by (a) losing money or (b) providing loans only to relatively good customers.”

Kevin’s characterization of the issue is largely right, but we can push a little bit on “b” here. Suppose that a worker has direct deposit of their paycheck every week at an account with the post office. The risk to the post office that this pay check won’t come in as expected is small. (Yes, people can and will game this, but most won’t, and almost no one will more than once.) This means that the interest rate can be adjusted downward accordingly. The person who is of questionable credit quality to the payday lender would be a relatively low-risk customer to the post office in this case.

The basic story with providing financial services to low and moderate income people is that it is a low margin operation. There is not much money to be made by servicing accounts that will typically have just a few hundred or at a most a few thousand dollars in them. The financial industry has discovered that the potential for profit is much greater by charging fees and penalties to these customers and in a market economy; we expect businesses to do what is most profitable.

Of course we all hope that the Consumer Financial Protection Bureau will limit the abuses in this area, but no one expects that it will be able to prevent all the bad practices. Why not just give people an alternative? Perhaps the Postal Service is not the best way to provide this alternative, but the fact that it is there, as noted by the IG, is a huge advantage in this respect.

Stepping beyond the issue of postal banking, there is a basic question of how we think about the Postal Service. We could say that the Postal Service provides a public service like the police department and fire department and understand that we will have to use public funds to help cover the cost. Alternatively, we could say that the Postal Service should be run on a business like basis, and therefore should be able to cover its costs from its revenue.

Both of these are reasonable ways to think about the Postal Service. It is not reasonable, however, to say that we expect the Postal Service to cover its costs like any other business, but then prevent it from moving into any sector where it threatens to impair the profits of existing businesses. This has been the practice for the last forty years. Given the constraints under which it has been forced to operate, it really should not be surprising that the Postal Service faces financial difficulties.