With President Obama’s strong support, the Consumer Financial Protection Bureau has launched a regulatory crackdown on payday lending, the short-term, high-cost loans that lower-income people use to cope with cash crunches — at the risk, critics say, of trapping themselves in a cycle of unpayable debt.
The question is, what’s the practical alternative? Payday lending is a $50 billion per year business because there’s a demand for it. People who can’t get quick cash from a storefront operator might turn to loan sharks, and nobody wants that.
To many progressives, including the bane of payday lenders, Sen. Elizabeth Warren (D-Mass.), at least part of the solution is to turn the U.S. Postal Service into a financial institution, with the authority to provide small-dollar loans at reasonable rates — as well as an array of other services, including savings accounts.
Mark Dimondstein, president of the American Postal Workers Union, says the post office could be a “public option” for the quarter of the population that the Federal Deposit Insurance Corp. identifies as being disconnected either totally or partially from the financial system.
The idea has a certain superficial appeal. Brick-and-mortar post offices already dot the landscape, often in areas where there is no bank branch; their staffs already sell money orders, a bank-like function. Postal buildings could be retrofitted and postal employees retrained.
Yet postal banking’s long history should actually be a red flag: Can we really resolve the cash-flow issues of the 21st century’s “under-banked” population based on a business model from the 19th century?
Giving this mission to a troubled, federally backed legacy institution would short-circuit potentially beneficial innovation by the private sector, including both existing financial institutions and “disruptive” newcomers. (Yes, postal banking also undermines check-cashing liquor stores and pawn shops, a desirable goal if you buy into the stereotype that these are unscrupulous exploiters, as opposed to family-run small businesses, that the government would be crushing.)
Advocates tout prepaid debit cards and bill payment as potential postal bank products. Maybe, but they would have to beat American Express’s Serve cards, say, or PayNearMe, a smartphone-based, cashless payment system that people can use at FamilyDollar and 7-Eleven — and even to pay rent. Interestingly, a recent FDIC survey noted that “underbanked households were more likely to have access to smart phones . . . than the general population.” Anyone really think the post office can keep up in this space?
At bottom, though, the problem with postal banking is a certain inherent tension between its policy objectives: Is the primary purpose to help low-income people, or is it to help the postal service make more money to offset the irreversible decline of its bread-and-butter business, first-class mail?
Supporters say “both,” which simply shows that they learned nothing from the last great federally backed effort to make money by cheapening credit for the masses, Fannie Mae.
Payday lenders don’t charge high fees and interest, or encourage revolving credit, because they’re evil — or because they face burdensome overhead costs that a postal bank would not, as is sometimes claimed. They do it because unsecured lending to borrowers who have no assets and little earnings is a highly risky business, and they have to compensate for those risks.
Indirect proof of this comes from a two-year FDIC pilot project, begun in February 2008, to test whether banks could offer lower-cost small-dollar loans as an alternative to payday-lending establishments. A report by Bretton Woods, a consulting firm, summarized the results: “It is clear that, on a stand-alone basis, these loans were not profitable to originate, underwrite and process.”
These same costs and risks, more or less, would face the Postal Service, too. If it couldn’t charge small-dollar borrowers enough to offset them, it would have to raise the money from other customers, like bulk mailers, or ordinary first-class letter-writers or, perhaps, taxpayers.
All of this would occur under the watchful eye of the Postal Service’s master, Congress, which is, in turn, acutely responsive to postal system “stakeholders” — a.k.a. lobbyists.
Indeed, postal banking would add a group — postal banking customers, or, more likely, public-interest organizations speaking for them — to that list of constituents. For its part, the bank lobby would suddenly acquire a defensive interest in postal service legislation.
Postal banking, in short, could exacerbate the fundamental cause of the postal service’s problems: dysfunctional, overly politicized governance.
Come to think of it, that’s the fundamental cause of a lot of our problems.
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