Why the US Post Office needs to compete with banks

Written by Reuters | Updated: Feb 5 2014, 10:24am hrs
Back in 2011, I said that the only way to save the Post Office will be to allow it to move into financial services, seeing as how banks in the US are mistrusted and disliked and many people would love to be able to just bank at the Post Office instead.

Thats still true, and has been given a lot more salience since the Posts Office inspector general released a 33-page white paper, last week, saying that the Post Office should move into what it calls, in its headline, Non-Bank Financial Services for the Underserved.

The report has been warmly greeted by Elizabeth Warren, on its own terms:

If the Postal Service offered basic banking servicesnothing fancy, just basic bill paying, check cashing and small dollar loansthen it could provide affordable financial services for underserved families, and, at the same time, shore up its own financial footing.

Warren also, however, praises David Dayens article about the white paper, which has an unambiguous headline: The Post Office Should Just Become a Bank. And Adam Levitin, who used to be Warrens co-blogger at Credit Slips, also uses the paper to push the idea of postal banking.

So lets be clear: theres a very important difference between postal banking, on the one hand, and what the inspector general is proposing, on the other. And while postal banking is a good idea, the non-bank proposal from the inspector general is simply not going to fly.

Indeed, its rather worrying and disconcertingnot to mention disingenuousthat the inspector general goes out of its way to say that the Post Office should be a non-bank, rather than a bank:

The Postal Service is well positioned to provide non-bank financial services to those whose needs are not being met by the traditional financial sector. It could accomplish this largely by partnering with banks, who also could lend expertise as the Postal Service structures new offerings. The Office of Inspector General is not suggesting that the Postal Service become a bank or openly compete with banks. To the contrary, we are suggesting that the Postal Service could greatly complement banks offerings.

This is a bit weird, since the centerpiece of the inspector generals proposal, the Postal Card, seems to do nearly all of the things that a bank account does.

The inspector general, it seems, wants the Post Office to partner with a real bank, which would ensure that the funds on the Postal Card were FDIC insured: such a setup would be similar to the way in which Simple (which is technically a non-bank) partners with Bancorp for such things. But this is nit-picking, really: Simple explicitly sells itself as a bank replacement, and the Postal Card does pretty much everything that Simple does, pluscruciallyloans. (Which are the one big banking service Simple doesnt offer right now.)

The inspector generalalong with Elizabeth Warrenis at great pains to point out how useful the Postal Card would be to the underservedthat is, the millions of Americans without bank accounts. And theyre absolutely right about that: 38% of post offices are in ZIP codes with zero bank branches, and so such a card would bring banking services to lots of people who have no easy access to them right now.

But if the Postal Card is as attractive as the inspector general paints it, then why shouldnt it also appeal to people who do have bank accounts After all, the white paper explicitly says that the Post Office should offer a diverse suite of financial services: this is a much broader proposal than the basic savings account, capped at $2,500, which the Post Office offered between 1911 and 1967. And while it might well make sense to farm out back-end services to a bank rather than making the Post Office a bank itself, the fact remains that the Post Office would still be competing with banks. (Which explains why the banks are so opposed to the idea.)

If the Post Office was hobbled so that it would compete only with payday lenders and not with banks, then the whole inspector general plan is, Im sad to say, a non-starterfor exactly the same reasons why the Church of England cant play a similar role in the UK. Non-banks compete on convenience, not on cost, and tend to be open very long hours; while the Post Office has the advantage that a lot of the underserved go there anyway, its still going to have real difficulty competing with Western Union, check-cashing stores, and all the other high-cost non-bank financial-services shops which do exist in the ZIP codes without banks.

In order to make a postal bank work, it needs to be a postal bank: it has to be able to take market share away from existing banks. That in turn means that the existing banks will fight tooth and nail to prevent such a thing from ever seeing the light of day.

The charitable view of the inspector generals report is that its essentially pushing a Trojan horse: that it will try to set the Post Office as a non-bank, on the grounds that doing so will help the underserved and not really compete with banks. Thats the only way Congress would ever allow such a thing to happen. But once the Postal Card is up and running, nothings going to stop the Post Office from competing directly with every bank in the country.

But if the Post Office is hobbled from day one in such a way as to prevent it from competing with banks, then the inspector generals idea is never going to work.

Felix Salmon