Like clockwork, every so often a new member of Congress will rehash an old, tired idea: having the United States Postal Service (USPS) make short-term, “payday” loans. The latest rework comes from Sen. Kirsten Gillibrand (D-NY), who recently proposed her Postal Banking Act.
The most obvious case against getting the post office into banking is that the USPS is terribly inefficient at the one job it is specifically designed for—delivering mail. Its first quarter financial report for fiscal year 2018 reported a loss of $540 million, following 12 consecutive years of financial losses, totaling around $65 billion. This is for a government monopoly with an $18 billion advantage over similar private sector companies, who all make healthy profits. The problems are so bad that the USPS has repeatedly attempted to cut operating costs by stopping Saturday delivery, only to have Congress force them to continue.
To think that USPS could simply layer on the task of banking millions of Americans is comical. Payday lenders themselves barely turn a profit, with the average margin around 3.5 percent. That’s because the average default rate for lenders is more than 20 percent. The overhead on payday loan stores itself accounts for around two-thirds of the fees lenders collect. None of these facts would change if the post office takes on the task. Having the U.S taxpayer take on that amount of risk would be a disaster.
Even if, hypothetically speaking, the post office was able to efficiently oversee small dollar loans at a rate that didn’t enormously increase the taxpayer burden, it still would not “wipe out” payday lending, as Sen. Gillibrand believes. Payday loans are relatively expensive. But these lenders are also quicker, easier, more confidential, have better service, and are open for longer hours than their competition.
Price is but one out of a number of considerations in taking out a loan. One survey, for example, found that 55 percent of current payday borrowers said they would prefer to borrow from payday lenders even if a bank or credit union offered an identical product. That may be why credit unions comprise around 2 percent of the current payday loan market, even though on average their loan rates are cheaper. In contrast, there are around 20,000 payday loan shops making approximately 150 million loans per year.
The reason why is quite simple. Surveys of payday loan consumers find that the most common reasons customers take out a loan is that they are an “easy convenient process [with] little paperwork” and that they were able to obtain “needed money quickly.” If your car breaks down and you need to fix it to get to work, you need a loan right away. Relying on a credit union—or USPS for that matter—that is only open 9 to 5 on Monday through Friday is not helpful when you’re facing a financial emergency.
The private sector is best at serving the needs of small-dollar loan customers, but the government too often gets in the way. Larger banks previously offered products known as “deposit advances,” which had an average fee of 10 percent—5 percent lower than the average price of a payday loan. But the Obama administration regulated them out of the market in 2013.
Even more promising is the rise of innovative financial technology firms. Internet-based lenders solve many of the problems with the current small dollar loan business model: they are branchless and are therefore able to lower their overhead costs while lending across large geographical areas. But inconsistent regulations at the state level and punitive regulations at the federal level inhibit these lenders from giving consumers a better option.
Sen. Gillibrand is right that too few working class Americans have access to quality financial services. But the answer isn’t to nationalize small-dollar banking; it’s to get the government out of the way. Opening up the market to competition from innovative lenders and traditional banks can address the problems that the post office cannot possibly solve.