Mailing It In

Mailing It In

USPS

How the Postal Service Wants To Be Your Bank

Coming off a $5 billion loss in 2013 and projecting much the same for this year, the U.S. Postal Service recently proposed branching into banking and financial services to pump more revenue into its failing operation.

Under a white paper released earlier this year, the Postal Service envisions offering a wide range of services to the “unbanked’’ in poorer neighborhoods, including prepaid cards, direct deposit, small loans, bill payment services and its own ATM network. The report points to the more than 35,000 post offices across the country as the infrastructure to launch its proposed banking business.

“If even 10 percent of what the underserved currently spend on interest and fees instead went to more affordable offerings from the Postal Service, it could lead to $8.9 billion in new revenue per year,’’ the white paper says. “Small market tests in key geographic areas could help to demonstrate new products’ viability.’’

But the lynchpin of the Post Office’s proposal entails serving a risky population with poor credit scores and history of defaults which critics say will add to the Post Office’s losses when loans go bad and taxpayers are left to pick up the tab.

“I want this idea to work so much,” Yahoo Finance’s Jeff Macke said in a recent interview on the site’s Daily Ticker Program. “But it won’t work because it’s a high-risk business. The Post Office won’t make money.’’

Community bankers are reacting with skepticism, wondering whether the Post Office will use its tax-free status to undercut banks – typically taxed at 38 percent.

“I think it’s not necessary and to think the Post Office could actually do a satisfactory job with this is completely ridiculous,’’ said Dennis Cirucci, chairman of the Pennsylvania Association of Community Bankers. “The banking business is not getting easier, it’s getting harder. To think the Post Office could get involved in this with absolutely no experience, I think they are downplaying the amount of taxpayer resources that will be needed.’’

Cirucci also questions the Post Office’s premise that many of the so-called “unbanked’’ want financial services. Community banks already offer free checking accounts, debit cards and services geared toward those of modest financial means. Cirucci, who is president and CEO of Alliance Bank in suburban Philadelphia, said community banks routinely do outreach to churches and other organizations to highlight their services.

“How is the Post Office, with their mediocre service and lack of financial expertise, going to attract these people?’’ Cirucci asks. “What can they do that community banks are not doing? The answer is nothing. Ultimately they will need to poach community bank employees to handle their financial transactions and train their staff. And they likely will be successful because of all the government benefits and minimal business hours. How else will they comply with all the OFAC requirements for new customers and what about filing CTR’s and SAR’s? And finally will they be audited and examined and subject to the same non-discrimination laws, penalties, and accountability as community banks?”

Post Office officials declined a request for an interview and would not discuss what plans, if any, it has to move forward on the proposal.

“The Postal Service appreciates all innovative ideas to generate revenue and enhance customers’ experience,’’ wrote spokeswoman Patricia Licata in an email. “The recommendations are being evaluated.’’

Officials with the Federal Deposit Insurance Corporation said they had not yet studied the proposal.

“Since the FDIC has yet to review the proposal, it is too early to speculate on future discussions,’’ said spokesman Greg Hernandez.

The Post Office’s banking idea is finding support with Democratic Massachusetts Senator Elizabeth Warren, who penned a column about it in the Huffington Post. Warren declined to be interviewed, but her staff pointed to her column stating her position.

In the piece Warren agrees with the Post Office’s contention that it could provide services to the 68 million Americans who lack checking or savings accounts, enabling these people to avoid high fees and interest rates encountered in payday lending services.

“With post offices and postal workers already on the ground, USPS could partner with banks to make a critical difference for millions of Americans who don’t have basic banking services because there are almost no banks or bank branches in their neighborhoods,’’ Warren said in the column. “If the Postal Service offered basic banking services – nothing fancy, just basic bill paying, check cashing and small dollar loans – then it could provide affordable financial services for underserved families, and, at the same time, shore up its own financial footing.’’

THE POST OFFICE’S PROPOSAL

At the heart of the Post Office’s banking proposal is its own reloadable prepaid “Postal Card,’’ on which users could load cash or directly deposit their paychecks. The card would potentially handle tax payments and refunds and other payments to government agencies. The funds on Postal Cards could be covered by the FDIC’s deposit insurance program in conjunction with a partner bank, according to the proposal.

The card and corresponding account would also be a vehicle for small loans.

Unlike community banks which offer ATM cards free to customers, the white paper suggests a $15 monthly fee for the card. Such a fee, according to the paper, could bring in $1.2 billion a year if 10 percent of the estimated 68 million “underserved’’ use the card. Postal ATMs could be located in Post Offices. A smartphone app could be developed allowing customers to deposit checks by taking a picture of them with their phone, the paper says.

The Postal Service cites its experience in selling prepaid American Express debit gift cards and said it is expanding that service to include cards from Amazon, Barnes & Noble, Subway and Macy’s.

Small consumer loans offered by the Post Office would not come at a bargain interest rate either.

An example used in the white paper has a customer borrowing $375 and charged an up-front fee of $25 and 25 percent in interest. In the example, the loan is carried for 5.5 months and the borrower pays $48 in interest and fees – as opposed to what the Post Office says would be $520 in interest and fees at an average payday lender. What penalties, if any, would accrue should the borrower miss payments, are not discussed.

The example appears to conflict with Pennsylvania’s tough restrictions on payday lending, which has kept such predatory businesses from opening in the commonwealth.

State law requires lenders to be licensed by the state Department of Banking to charge an interest rate of more than 6 percent on loans under $50,000. Licensed lenders are capped at charging roughly 24 percent interest on loans up to $25,000.

To guard against defaults, the white paper suggests using the Treasury Department’s offset program, which allows federal agencies to collect debts from tax refunds.

“While testing, experimentation, and review would be required, this potential risk reduction could allow the Postal Service to offer loans to otherwise high-risk borrowers at affordable rates,’’ the paper says.

The Postal Service may also offer banks an opportunity to participate in the program: “To help fund credit products, the Postal Service could rely on partnerships with banks or other institutions, which could hold Postal Loans on their books.’’

Banks, the paper says, could also earn credits toward fulfilling their Community Reinvestment Act requirements through partnering with the Post Office; though the paper doesn’t go into details on how such relationships may work.

Another revenue stream contemplated by the white paper would be for the Post Office to become involved with overseas electronic money orders, which the paper says is an important product for the nation’s immigrant community. One way to do this would have the Post Office join the International Financial System (IFS) of the Universal Postal Union (UPU), which handles money orders and wire transfers in at least 60 countries, the paper says.

The Post Office already has 70 percent of the U.S. paper money order market – which in 2012 brought in revenue of $53 million after expenses. In looking to expand into electronic transfers, the paper points out that the paper money order market is shrinking due to electronic competition.

Not mentioned is how the Post Office might deal with the range of anti-money laundering compliance regulations that surround currency transactions.

The Post Office points out that from 1911 to 1967 it did provide limited financial services. To minimize competition with banks, deposits were limited to $500 and interest rates to 2 percent.
While critics see many problems and uncertainties surrounding a new Post Office banking system, what is clear is that the Post Office is facing a continuing financial crisis.

In its 2014 fiscal year plan, the Post Office projects losses of $4.6 billion and a drop in mail volume from 158.4 billion pieces to 154 billion.

“Although the economy is expected to improve modestly in 2014,’’ the fiscal report says, “the positive effect of economic growth will not be strong enough to overcome the negative impact on mail volumes from forces brought about by the Great Recession, including shifts in consumer and business attitudes and behaviors that affect their need for and use of the mail.’’

CRITICS’ CONCERNS

Rory Ritrievi, president and CEO of Mid Penn Bank and chair of PACB’s Legislative Committee, said he doesn’t see how the Post Office’s numbers add up in a way that will make money for the agency.

“They say there’s this population of 68 million that are [financially] underserved, but if you look at the reasons in the report, 21 percent don’t want a bank account, 8 percent say they don’t trust banks or like dealing with them and 7 percent say it’s because of previous credit history, which means they probably didn’t handle accounts properly or defaulted on loans,’’ Ritrievi said. “Another 6 percent said a bank closed their account, but banks don’t have a habit of arbitrarily closing accounts; it’s usually because they are mishandled.

“So you’re looking at 42 percent of this population that are unbanked either because they don’t want to be banked or misused their banking privileges in the past,’’ he said.

“The reason this population is served by payday loans and pawn shops that charge high interest is because of a high default rate,’’ Ritrievi said. “The Post Office says it will charge a tenth of [what payday lenders charge], but how are you accounting for the risk? You can’t create a new way to handle all these needs and do so at a fraction of the cost and still be profitable and make everybody happy.’’

And if the Post Office starts seeing loans go bad, Ritrievi said, it’s the taxpayers who will end up on the hook.

“The title of the white paper and the basis of it is the Post Office saying ‘we’re here to help,’ but reading through it, they keep pointing to how much money they can make to help solve their problems and I think it’s going to be difficult to meet those two goals,’’ he said. “You’re either going to help the underserved or you’re doing this to make money, but trying to do both is difficult.’’

George Mason University School of Law professor Todd J. Zywicki expressed many of the same concerns.

“I confess it was kind of hard to keep a straight face as I was reading [the white paper],’’ said Zywicki, adding that the Post Office is having enough problems with its current business. “So the idea that now we would give them banking seems so surreal, and even more surreal is that some people appear to be taking this seriously.’’

Zywicki said the proposal displays what he called the Washington mentality, i.e. consumer credit should be treated like a regulated utility, with no competition or choice of products. Instead of trying to turn the Post Office into a bank, Zywicki calls for “clearing away regulatory obstacles to new banking products’’ by eliminating burdensome regulation. One example is the limits on overdraft fees enacted in 2009. The lost revenue caused banks to scale back on free checking accounts and to impose new fees, he said.

According to Zywicki the proposal overlooks the large up-front cost of getting into the banking business – a cost he doesn’t see recouped through servicing low income customers.
“This is a population for [banks] for whom the risk is high and profit margins are low,’’ he said.

“What happens if they start getting a rash of defaults – do they just eat that?’’ said Zywicki, who also criticized the plan in a recent Washington Post column. “That’s how we end up putting the Postal Service further in the red ink hole than they are already.’’

Timothy K. Zimmerman, secretary of the Independent Community Bankers of America, said he, too, is concerned about allowing the Post Office – with no experience in lending, especially to high-risk customers – into the banking system.

“This is a concern for taxpayers,’’ said Zimmerman, who is also president, CEO and director of Standard Bank in Pittsburgh. “This is an organization that is not doing well. It had a monopoly and ruined that and now, even though it can’t run a business it knows well, it is going to go into a business it doesn’t know. The pieces just don’t fit.’’

Zimmerman said the very premise that the banking system and especially community banks don’t reach out to all potential customers is wrong.

“Most community banks still offer free checking accounts,’’ Zimmerman said. “If someone can’t or won’t maintain a checking account properly and can’t have an account in the established banking system, they won’t be able to maintain one at the Post Office either.”

“That’s where you also worry about how much the taxpayers are going to be in for if the Post Office gets into banking. If the Post Office is not going to charge fees when someone overdrafts or doesn’t maintain their balance, someone is going to be subsidizing those services,’’ he said. “Since the Post Office doesn’t have reserves, it will be the taxpayers subsidizing the costs for people who don’t properly manage their accounts.”

This article can be found featured in the April 2014 issue of Transactions. Not a subscriber? Visit the Transactions page on this website or call PACB at 717-231-7447 to start receiving the magazine.