In late April, US Senator Kirsten Gillibrand (D-NY) introduced the “Postal Banking Act” (S. 2755) which would establish retail banking services at all 30,000 United States Postal Service (USPS) locations throughout the country.
Sen. Gillibrand claims this bill would help nearly 35 million underbanked or unbanked Americans, who often lack access to checking, savings accounts, and other retail banking services, and whose only legal access to loans comes in the form of “payday lending,” a segment of the financial industry Sen. Gillibrand wishes to see “wiped out.”
A 2014 Inspector General report saw a USPS banking system as a means to revive its finances. USPS lost $1.3 billion in the first three months of 2018 and has lost well over $50 billion since 2007.
But banking services should be left to the banking industry. In 2014, then-Postmaster General Patrick Donahoe expressed concern over postal banking:
“We don’t know anything about banking. We’d be perfectly interested in talking to someone who would want to use the facility to accept a deposit, but to set a banking system up and lend money to the unbanked. We don’t know anything about that.”
While Sen. Gillibrand’s desire to reach individuals who lack access to banking services is admirable, in practice, a USPS banking regime would likely drive the government agency further into financial straits, place taxpayers at risk, and hurt low-income borrowers.
Japan Tried Postal Banking: USPS Shouldn’t Follow Suit
Japan Post Holdings Co. (JP Holdings)—the holding company of Japan Post Co., Japan Post Bank, and Japan Post Insurance—was partially privatized in 2015. The government of Japan retains 57 percent ownership of JP Holdings, which in turn holds 74 percent of Japan Post Bank (JPB). The formerly state-owned JPB highlights the clear dangers that can arise when a government-owned postal bank has the capacity to make risky loans.
Japan Post’s deposits from savings previously funded public projects through the Ministry of Finance (MOF) under the Fiscal Investment and Loan Program (FILP) until 2001. After 2001, an overhaul expanded a reform from the 1990s that gave Japan’s post office the authority to invest small shares of funds at its own discretion, rather than surrendering the funds to the MOF. By 2012, Japan’s Post Office had no deposits going into FILP and was operating more autonomously with investments from deposits.
Why were JPB’s lending practices problematic? JPB has a record of issuing below-market-rate loans to insolvent borrowers known as “zombie companies.” The government-backed guarantee from bank deposits that were supporting the zombies produced an ineffective program to maintain employment. Therefore, the usual competitive process where these zombie companies would cut workers and lose market share was halted. The zombies also crowded out profitable companies and dissuaded them from entry and investment into the market.
This would present a challenge for a USPS bank because politicians having access to a government-owned bank could expose it to large-scale corruption. A postal banking regime like the one Sen. Gillibrand’s bill proposes could permit USPS with the same capacity to engage in the type of irresponsible lending that Japan Post Bank exhibited.
Government Lending Has Already Had Dire Consequences
The troubled history of government loaning money to individuals can be observed when examining student loan debt, which experienced more than 1.1 million students defaulting on federal student loans in 2016.
Postal banking loans could be similar to student loans in that postal banking loans would have highly-subsidized interest rates that would hardly get priced according to risk and would be backed by an implicit government guarantee (i.e. taxpayers).
Recovering defaulted loans could be a painful process for postal banking borrowers because government regulations already prevent student loan debt from being discharged in bankruptcy.
Sen. Gillibrand‘s aim to “wipe out” an entire industry of payday lenders and replace it with another lender—the government—could result in placing taxpayers on the hook for millions of dollars should borrowers default on their loans.
Payday lenders already experience a 20 percent default rate on their loans to over 12 million individuals. One would expect at least similar default rates from USPS-granted loans. And when adding a portion of the nearly 35 million underbanked/unbanked individuals that proponents of this bill seek to serve, the amount of defaulted loans could be significantly higher—regardless of how low-interest rates would be—because most payday loans are used for emergencies by those already in financial straits.
A Better Option to Postal Banking
Rather than expanding USPS’ scope with a new non-essential, non-core service to offer consumers, turning the USPS into a publicly-traded corporation through an initial public offering (IPO) would be a better, less risky alternative for improving USPS’s financial situation.
Many countries, including Germany, Britain, the Netherlands, Japan, Belgium, and France, have corporatized their postal systems, or fully- or partially-privatized them. The results demonstrate that privatizing a national postal service is not only possible but can yield positive results.
Under corporatization, the government typically retains a majority stake ownership of the company until it feels comfortable selling off their shares. A corporatized USPS would be free to operate more like a private entity and less like the USPS of today, which remains under strict congressional control. It’s imperative that any privatized USPS not engage in any risky endeavors that mirror Japan’s postal banking arm, precisely the sort of behavior that Sen. Gillibrand’s proposed legislation invites.
Germany’s Deutsche Post has had great success privatizing its postal system. Its strategic partnerships and acquisitions have been a major key to success in postal privatization. Deutsche Post’s 2002 acquisition of DHL—a global express shipping company with 71,000 employees worldwide—gave it access to an international network. It also acquired UK Mail in 2016 and further expanded their European cross-border parcel network. Also, in 2016, DFS Deutsche Flugsicherung, Deutsche Telekom, DP DHL, and RWTH Aachen University launched a joint research project with drones.
USPS currently doesn’t have the financial capacity to engage in such acquisitions and partnerships due to the many constraints Congress has placed on it, along with its struggle to innovate and adapt to changing times. However, a publicly traded USPS with less government interference—that had a responsibility to seek profits for itself and other shareholders—could seek access to equity markets for capital investment, which would help them obtain the necessary financial capital to innovate.
The optimal privatization path would be to transform USPS into a publicly-traded company to allow private investment while opening its first-class letter delivery monopoly up to competition. Given the political difficulties of turning the USPS to a private company, to limit opposition the government could retain a majority stake in the new company to ensure the universal service obligation is still fulfilled. When politically palatable, the private USPS entity could enlarge its capital base by selling off shares from the government’s majority stake to private investors, gradually making government a smaller, minority shareholder.
USPS has government-created privileges such as cheap loans from the Treasury at highly-subsidized interest rates, which would give it an unfair advantage over its potential banking competitors, payday lenders. Undermining the payday lending industry that has priced in credit risk would distort the true cost of loaning money and individuals defaulting on their loans would further threaten taxpayers to compensate for those losses.
Despite government-created privileges, the USPS still loses hundreds of millions of dollars annually. Their financial challenges derive largely from a declining first-class mail volume—their main source of revenue—from a high of 103.7 billion pieces in 2001 to 58.7 billion pieces in 2017, a 43 percent drop.
Instead of a postal banking regime that would threaten taxpayers, while leaving the door open for massive corruption and irresponsible lending, USPS should consider postal privatization. International postal privatization demonstrates the levels of success that can be achieved, and USPS could pursue that option instead of perilous endeavors for which the USPS admits it has no capacity to undertake. As stated by former Postmaster General Patrick Donahoe, “we don’t know anything about banking” so using USPS to “set a banking system up and lend money to the unbanked” could end up doing more damage to borrowers and taxpayers than good.