Restarting Postal Banking Services Could Help Recover From COVID-19


By Mélanie G. Long 5 minutes Read

Financial services play a major role in the economic life of most Americans, from the time their paychecks are deposited directly into a bank account, to the loan taken out to buy their first home or car.

Yet more than 12 million people – about 6% of American adults –cannot access these services because they don’t have a bank account. Economists call these financially excluded or “unbanked” people. Being unbanked is Dear, both financially and in terms of missed economic opportunities, and most afflicts communities of color.

The coronavirus recession exposes these costs even further. For example, unbanked people had to wait much longer that those who have accounts to obtain “economic impact” controls– and some are still waiting. Quick access to emergency loans is vital to helping the poorest Americans weather the crisis.

Inasmuch as economist who studies financial exclusion, I believe that there is a solution to the problem, and that the United States has already tried: postal banking.

The costs of financial exclusion

Financial exclusion is not a new problem.

His roots in the United States dates back to the Federal Housing Administration’s New Deal, which limited mortgage lending to middle-income, predominantly white suburbs. The problem worsened in the 1980s and 1990s, when deregulation allowed banks to operate across state lines, resulting in a decrease in the number of community banks. National banks were less willing to lend in lower-income neighborhoods.

Today, black and Hispanic Americans are three times more likely be unbanked than whites. This is partly explained by the number of bank branches in communities of color and low income communities fell. Overall, the number of bank branches has decreased by 6% since 2012.

While some people avoid banks because of the fees, being excluded from the banking system has other costs. With less access to other lines of credit, the unbanked are more likely to use expensive alternatives such as title loans – in which a borrower uses a vehicle title as collateral – for emergency expenses. The annual interest rates for these loans can be up to 300%.

And being unbanked means it’s harder to develop a credit history. Without one, it’s harder to get a mortgage — and so much more difficult to buy a house.

Black Americans in particular are more likely to lack of credit scores and are 40% less likely to be owners. Since home ownership is one of the main sources of wealth for middle-class Americans, it contributes to big racial wealth gap.

COVID-19: Worse for the unbanked

The COVID-19 pandemic, causing a dramatic collapse in economic activity and skyrocketing unemployment rates, aggravated these problems.

Even in the good times, more than 10% of Americans state that they are unable to pay an unforeseen expense of $ 400 and that they would have even more difficulty without access to credit.

Those without a bank account have even fewer options for getting emergency cash, such as a security or payday loans. Another option, which my research shows is especially true with women of color, is asking friends or family for money. Yet, with unemployment rates reaching a staggering 19.5% for Hispanic women and 17.5% for black women, community resources will be strained.

Financial exclusion has also hampered the deployment of part of the coronavirus rescue which promised stimulus payments of up to $ 3,400 per family. Americans with checking accounts received payment within weeks by direct deposit, while those without had to wait. much longer. From the beginning of June, 13-18 million Americans who were waiting for a check still had not received one.

This delay is more than an inconvenience for households living from paycheck to paycheck. Many Americans urgently need prescriptions they do not have the means and risk be evicted from their homes.

How postal banking works

Conventional banks claim they cannot serve the unbanked because small loans and accounts with low balances are not profitable.

Postal banking, however, could serve the unbanked and do so effectively. While there is various manners To achieve this, a basic postal banking system would allow each branch of the United States Postal Service to act as a limited-service bank, offering services such as checking and savings accounts, prepaid debit cards and small loans.

As a public company that doesn’t have to worry about rewarding investors, the USPS could offer financial services to more Americans at a lower cost than banks. USPS branches are already located in virtually every neighborhood in the United States, and more than half are in banking deserts. This existing network would reduce overhead costs. And the USPS is better positioned to handle a default because it could enter tax refunds, reducing the cost of collecting unpaid loans.

In addition, it would also offer a financial lifeline to the Postal Service, which has losing money for over a decade. The USPS predicts that the postal banking offering could provide between $ 8 billion and $ 10 billion additional income per year, which would offset at least part of its current shortfall.

History and current practice show that postal banking is feasible. He is Already used in 139 countries around the world, such as France, New Zealand and Italy.

And in the United States, Congress created a government guaranteed savings plan in 1910 to encourage people to put their money into the financial system – like opposed to their mattresses and cookie jars. According to “How the Other Half Banks”, by an expert in banking law Mehrsa Baradaran, the United States Postal Savings System was very popular. At its peak, it held $ 3.4 billion in deposits.

But after World War II, conventional banks began offering much higher interest rates on their deposits – with the same government guarantee. And banks have started opening branches in more underserved neighborhoods. The Postal Savings System ceased to receive new deposits in 1966.

[Depositors stand in a queue at a postal savings window. Photo: Smithsonian National Postal Museum]

Reduce inequalities in financial services

Now a growth Chorus of voice suggests that now is the time to bring him back.

The details differ from one proposal to another. Some supporters—including USPS itself—Consider postal banking as a complement to private sector banks, which would continue to offer a wider range of services. Others support a public bank that would compete directly with private banks through a financial services market.

Banks, including small community banks, generally opposed the postal bank. However, the experience of other countries suggests that a postal bank can coexist with a thriving financial services industry, while ensuring that fewer Americans are left behind.

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