While the idea of offering banking services at post offices continues to excite progressives in Congress, it probably will not appeal very much to its intended customer base if implemented. It is hard to imagine unbanked millennials flocking to their local post offices to check their balances and cash checks in today’s digital world.
Senators Kirsten Gillibrand (D-NY) and Bernie Sanders (I-VT), along with three House members, are hoping to include postal-banking pilots in the fiscal year 2022 budget. In announcing the plan, Sen. Gillibrand said:
Mainstream financial institutions and predatory lenders often take advantage of underbanked Americans with high fees and interest rates that keep them in a cycle of poverty. As families across the country try to recover from the economic crisis, establishing postal banking pilot programs would ensure these communities have financially safe and reliable banking services . . . Expanding basic financial services at post offices in both rural and urban communities would help families who know just how expensive it is to be poor in America. This pilot program takes important steps to help struggling Americans and reintroduce widespread postal banking.
Sen. Gillibrand’s release goes on to state that 63 million Americans are “underbanked,” relying on a Federal Reserve report that categorized Americans as fully banked, unbanked, or underbanked. The Fed defines an unbanked individual as someone who does not have a checking, savings, or money market account. About six percent of adults fall into this category. The larger underbanked category, which accounts for 16 percent of adults, encompasses those that have a bank account but have used alternative financial products including money orders, check-cashing services, pawnshop loans, auto title loans, payday loans, paycheck advances, or tax-refund advances.
This definition of “underbanked” seems too broad to capture people who are underserved by the financial services industry or would benefit from postal banks. For example, tax-refund advances are often available from tax-preparation services without interest or fees to their clients. While it is true that these services charge fees to prepare tax returns, many consumers prefer to pay such fees rather than undergo the hassle of completing tax forms.
Money orders are typically inexpensive ($1 or less at Walmart, for example) and provide greater security than personal checks. In fact, the U.S. Postal Service offers money orders, albeit at a slightly higher price than Walmart.
Check-cashing services can be expensive but may be more convenient than using a bank, especially after normal business hours when tellers (and postal clerks) are off duty. Walmart cashes preprinted checks for a flat fee of $4 for amounts less than $1,000, or $8 for checks between $1,000 and $5,000. This is hardly predatory pricing.
In summary, people who have bank accounts, but also use tax-refund advances, money orders, or some check-cashing services do not appear to need a new postal bank to address their “underbankedness.”
The various types of short-term loans used by the so-called underbanked can have unfavorable terms. But the steep annual percentage rates lenders charge are, in part, a function of high default rates among borrowers. If the postal service wanted to operate a bank on a breakeven basis, it too would have to charge high rates to some categories of borrowers.
Absent a large taxpayer-funded subsidy to offset the losses associated with providing more favorable terms on these loans, the market for a postal bank would be considerably smaller than the 63 million figure Sen. Gillibrand cites. And even if there is a legitimate need to provide better access to these services, other institutions are stepping in to serve prospective users of a postal bank.
Over the last few years, a group of venture-capital-backed firms has formed to tackle the needs of unbanked individuals. These “neobanks” do not have physical branches but are available to customers 24/7 through smartphone apps. The leading neobank, Chime, has raised $1.5 billion in venture capital and is valued at $14.5 billion. It offers an online account with a debit card and without fees, minima, or credit checks. Chime has several well-funded competitors including Dave, N26, and Varo. Even Robinhood, the online stock brokerage catering to younger customers, is now providing some cash-management services.
Neobanks, along with many traditional banks, are making it easier to conduct financial tasks online. Consumers have long used desktop and mobile banking to check balances, pay bills, and transfer funds between accounts. More recently, using smartphones to deposit physical checks has become commonplace. According to a Cornerstone Advisors survey, 32 percent of individuals aged 55-64 prefer mobile check deposits to in-person deposits. For those aged 18-24, the preference for mobile check deposits rises to 65 percent. As more people become comfortable with banking technology and apps improve, these proportions will almost certainly grow.
Cash transactions cannot be handled by mobile banking apps, but neobanks have found ways to make them convenient. Chime, for example, allows both cash deposits and withdrawals at Walmart, Walgreens, CVS, and other retailers.
It is also important to consider how the declining use of cash is changing banking. Even before the COVID-19 pandemic, Pew Research found that 29 percent of U.S. adults were not using cash in a given week. During 2020, the number of Americans using mobile payment platforms such as Apple Pay increased 29 percent and is expected to exceed 100 million in 2021, according to market research firm eMarketer.
These trends are translating into fewer visits to bank branches and shrinkage in branch networks. A survey conducted by Self Financial found that over half of respondents visit banks once per month or less. Self also found that the number of bank branches has declined 6.5 percent since 2012 and that closures are accelerating.
A new U.S. Postal Service bank would enter an environment characterized by rapidly evolving financial technology innovation and a rapid transition away from in-person banking. Not renowned for its agility and encumbered by thousands of underutilized brick and mortar facilities, it is hard to see how the U.S. Postal Service could effectively compete in this environment, let alone what value it might add.
A version of this column first appeared in National Review.