KENNEDY: Thinking outside the bank

Let me begin with a caveat: I’m no expert on financial services or the economics of banking. Like most middle-class Americans, my interactions with banking are all decidedly “retail”—checking and savings accounts, mortgages and car loans.

That said, I was struck by a recent report released by the Office of the Inspector General of the U.S. Postal Service. Evidently, some 68 million Americans—more than a quarter of all households—don’t even have that retail banking experience. Those households have no checking or savings accounts; in the typically dry language of such reports, they are described as “underserved” by the banking system.

How do people get along in a society where payments are made by check, or increasingly, electronic transfer? How do the (growing numbers of) people scraping along paycheck to paycheck access short-term loans when they hit a rough spot?

Evidently, by spending a lot more than the rest of us.

According to the report, these households collectively spent $89 billion in 2012 on interest and fees for non-bank financial services like payday loans and check cashing. That works out to an average of $2,412 per household. The average underserved household spends an astonishing 10 percent of its annual income on interest and fees—about the same amount they spend on food. As Massachusetts Sen. Elizabeth Warren wrote in a column commenting on the report, “The poor pay more, and that’s one of the reasons people get trapped at the bottom of the economic ladder.”

Warren suggests we consider the report’s intriguing solution to the problem: Allow the Postal Service to offer basic banking services—“nothing fancy, just basic bill paying, check cashing and small dollar loans.” That would provide affordable financial services for underserved families and, at the same time, improve its own financial position. Postal services in many other countries provide these services, and have seen their earnings increase rather dramatically.

A recent article in The New Republic endorses the idea. In “The Post Office Should Just Become a Bank: How Obama Can Save USPS and Ding Check-Cashing Joints,” David Dayan writes that such an initiative would preserve one of the largest job creators in the country, save billions of dollars for the poor, and develop the very ladders of opportunity Obama champions. What’s more, this could apparently be accomplished without congressional action, but merely through existing executive prerogatives.

What’s the policy? Letting the U.S. Postal Service offer basic banking services to customers, like savings accounts, debit cards and even simple loans. The idea has been kicked around policy circles for years, but now it has a crucial new adherent: the post office inspector general, who endorsed the initiative in a comprehensive white paper.

With all policy changes, there are naysayers. Are there arguments against the Postal Service offers basic banking services? If so, who will make those arguments?

Probably not the banks; they aren’t doing business with these mostly low-income individuals, anyway. No, it will be the check-cashing stores, pawn shops, payday lenders and other predatory financial services that will feel the competition—the same industry that took its customers for $89 billion in interest and fees in 2012. According to the inspector general report, post offices—which are already conveniently located in U.S. communities—could deliver the same services at a 90-percent discount—and save postal service jobs.

Looks like a win-win to me.•

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Kennedy is a professor of law and public policy at the School of Public and Environmental Affairs at IUPUI. She blogs regularly at www.sheilakennedy.net. She can be reached at skennedy@ibj.com. Send comments on this column to ibjedit@ibj.com.