One of the more surprising (that’s a euphemism, by the way) ideas of addressing the problem of unbanked and underbanked consumers is the idea of getting the United States Post Office into the banking business (here’s the post office’s proposal). The argument seems to be that there are a lot of unbanked consumers, and the post office has all these buildings around that could be used for banks. Why financial services and not, say, fresh vegetables and other products that are hard to find in certain areas of the country? That’s not exactly clear.
Regardless, Jim Epstein discusses three ideas for how to better serve the unbanked — without the post office. I’m not sure I agree with all of them (most notably the lotteries idea) but I certainly agree with clearing away regulation and allowing new banking models to flourish. If we want to bring more people into the mainstream banking system, repealing the Durbin Amendment is a no-brainer. And clearing away regulatory obstacles to new banking products is important as well — including, of course, repealing the Durbin Amendment, which is probably the single largest obstacle today to prepaid cards evolving into a fully functional mobile banking platform for lower-income consumers.
To this list I would add another — grant Wal-Mart a bank charter so that it can compete with traditional banks. It seems absurd to me that banks can open branches in grocery stores — and presumably even in Wal-Mart itself — yet Wal-Mart (or Safeway or Target or Sam’s Club) is not permitted to simply run its own bank. I’ve always thought that the opposition of incumbents to Wal-Mart obtaining a bank charter was nothing but rent-seeking designed to prevent competition; I’ve never found the arguments against granting Wal-Mart a bank charter to be particularly persuasive. I think this proposal is well within Epstein’s third idea of allowing competing banking models to flourish.
But there is another question — even if the Post Office does enter into the business of serving unbanked and underbanked consumers, is it likely to actually be a viable competitor? To be sure, the Post Office enjoys a privileged position that allows it to avoid many of the costs of operation that private businesses face, so in theory it could offer banking services at a lower price than banks or payday lenders (of course, for the same reason it could theoretically offer manicuring, massage, or car repair services less expensively as well). But it is not clear that even if the Post Office did try to enter this particular business that it would be particularly successful.
First, it is well-known that although providers of alternative financial services, such as payday lenders and check-cashers, compete on price a bit, they also compete heavily on non-price margins such as convenience, speed, operating hours, customer service quality, and the like (I summarize the research here). Whatever one says about the virtues of the Post Office, convenience, customer service, and speedy service are not typically described as the Post Office’s defining characteristics.
Second, there seem to be inherent limits on the price at which small-dollar loans can be offered. Many of the costs associated with making a small-dollar loan or check-cashing do not scale with the size of the loan. It takes a teller more or less the same amount of time to make a $50 advance as a $500 advance, the fixed costs of rent and electricity are unrelated to the size of the loan, and many underwriting costs are unaffected by the size of the loan. This economic reality is likely one reason why even though payday loan prices seem high, for example, there is no evidence of economic rents in the industry. Nor is there evidence of economic rents in other alternative financial services industries (at least as far as I am aware). Some of these products have high and idiosyncratic risks as well, which also contributes to the lack of a finding of economic rents in the industry. (Note I am using the term “rents” specifically here in hope that readers will understand that this is not the same as accounting profits.)
In short, the idea of allowing the Post Office to offer financial services seems to me to be a half-baked solution to a problem created by government regulation in the first place. Repeal the Durbin Amendment, grant Wal-Mart a bank charter, and eliminate other regulatory barriers that stifle the evolution of mobile banking and other platforms that can provide consumers with flexibility to move away from the traditional one-size-fits-all model of demand deposit accounts. That certainly seems like a better plan than sending the Post Office down a trail which it appears to have no comparative advantage and which over the long run seems destined to turn into yet another money-losing proposition.