What if the only thing standing between you and Chapter 11 was the price of a trip to the barber? In 2012, the average American who declared bankruptcy was just $26 per month shy of meeting expenses.
One in four households is financially underserved (lacking a bank account or relying on expensive credit sources such as payday loans) and pays roughly $2,400 a year in interest and fees to costly financial services. Saving even a fraction of those fees could go a long way toward making ends meet and avoiding bankruptcies. Help may be on the horizon: The U.S. Postal Service Office of Inspector General just proposed a new way to widen access to affordable capital.
The OIG’s proposal, “Providing Non-Bank Financial Services for the Underserved,” outlines a suite of financial services the post office could bring to the public, including a Postal Card that could be used to pay bills and even take out small loans at much lower interest rates than those charged by payday lenders – which can amount to 450 percent annualized. The plan is pitched as a win-win: USPS can produce revenue to reduce its $5 billion budget deficit while saving the underserved billions of dollars. Its proposed Postal Loan program would function as a payday loan alternative with less than one-tenth the interest and fees. To reduce the risk associated with this type of loan, the USPS could take advantage of an offset program from the U.S. Treasury Department, allowing it to collect unpaid loan debts from a debtor’s tax refund.
One of the most compelling arguments for the USPS to provide financial services is its vast, conveniently located infrastructure. Many branches are set in “bank deserts,” communities where banks are scarce and predatory lenders thrive. Nearly 60 percent of post offices are in ZIP codes with one or branch or none. That percentage is likely to rise as banks continue to shutter outlets in low-income areas. (More than 90 percent of branch closings in the last five years were in ZIP codes with average household incomes below the national median.)
Our earlier research has shown that payday lenders thrive in areas where traditional banking services are limited – and Los Angeles clearly exhibits this. To explore how feasible the USPS’ proposal is in our own backyard, first we pulled post office locations from the USPS website. We combined that with the number of payday lenders in 2011 (from the California Department of Business Oversight) and 2012 per-capita income by L.A. County ZIP code from the U.S. Census.
We found that 80 percent of payday lenders are located in ZIP codes below the per-capita income median of $26,989, whereas almost 70 percent of bank branches are located in those above that mark. While post offices are roughly split, there are 36 more offices located in disadvantaged areas—an indication that USPS reaches both low- and high-income consumers. As an urban center like Los Angeles demonstrates, the USPS OIG’s proposal to provide simple financial services in lower-income areas shows promise.
Of course, what sounds good in theory doesn’t always work in practice, and some observers are skeptical that the USPS could successfully execute this ambitious plan. The USPS suggests that it could achieve its goal “largely by partnering with banks, who also could lend expertise,” stressing that rather than competing, banks and the Postal Service could work together to complement each other’s offerings.
But the feeling isn’t mutual. Consumer Bankers Association CEO Richard Hunt insinuated that the proposal was a poorly timed April Fool’s joke and likened it to “the banking industry moving into running the airlines.” Ken Clayton, chief counsel for the American Bankers Association, raised concerns about creating a new government-sponsored enterprise and an uneven playing field resulting. Beyond bankers’ objections, post offices generally lack a reputation for excellence or expedience in customer service (though the crowded branch near where we work always has fast-moving lines and friendly staff). Not to mention concerns about whether budget-constrained branches have the capacity to take on a new line of business.
Nonetheless, the fact remains that 68 million Americans are financially underserved. In our view, a public-private partnership may be a worthwhile approach to a problem that neither public nor private sector has addressed effectively so far.
Priscilla Hamilton and Donald Markwardt are research analysts at the Milken Institute, a Santa Monica-based think tank.