The Problem with Postal Banking

Veteran American Senator Bernie Sanders, as well as Alexandria Ocasio-Cortez, who has now become the voice of the Democrats, are of the opinion that the United States Postal Services (USPS) should be allowed to perform the functions of a bank.

According to them, this solves two important problems. Firstly, there is the problem of financial inclusion. Many Americans, particularly the lower income group in rural America, do not have access to proper financial services. This is where post offices have a wide network. Secondly, the concept of the post itself has become obsolete since the introduction of e-mail and other faster means of communication.

Many people believe that the postal infrastructure which is laying waste as of now can be used for banking activities, and this would create a win-win situation for the Americans as well as the postal service itself. This idea is being called postal banking.

In this article, we will have a closer look at the concept of postal banking so that the issues related to the same can be brought to the front.

Issues with Postal Banking

Postal banking is not really a new phenomenon in the United States. The United States post has previously offered banking services between 1911 and 1966. During that time period also, the services were geared towards the needs of the lower income groups. However, over a period of time, the American post had to stop providing banking services. This was because consumers were not using these services. Instead, they were preferring the services being provided by private banks. This was because of the many disadvantages of the postal banking model. Some of these disadvantages have been listed below.

• Incoherent Proposals: Firstly, Sanders and Ocasio-Cortez have suggested two proposals, and they are contradictory. On the one hand, they want the credit card interest rates to be capped at 24% whereas, on the other hand, they want the United States Postal Service to provide payday loans.

  Now, payday loans are inherently risky. They are typically given to customers who have a poor credit profile. Also, these loans tend to have a very high default rate. About 15% of these loans are never returned despite very aggressive collection practices. Hence, higher interest rates are required to offset these high default rates. If both proposals suggested by Sanders and Ocasio-Cortez are implemented simultaneously, they will put the United States Postal Service in serious jeopardy.

• Hotbeds of Corruption: America is not the only country which has thought of the idea of postal banking. Other countries like Japan have also experimented with this idea. At its peak, Japan had a postal bank which controlled over $2 trillion and was considered one of the largest banks in the world at that time! However, the Japanese experiment also failed.

  This was primarily because the Japanese postal bank started becoming a hotbed of corruption. Instead of lending out money to projects that deserved to be funded, Japanese banks would lend out money to the projects which were backed by politicians. As a result, a lot of bad loans got made, and the government ended up losing a lot of money in the process.

• Different Skill-Sets: It is true that the United States Postal Service does have the real estate and the distribution network required for any successful bank. However, that is exactly where the similarity ends. This is because the workforce required for banking and postal services are expected to have completely different skill sets.

  For instance, bank employees are supposed to be financially smart and tech-savvy. This is because they need to deal with money and also use the software. Also, bank employees must be trained to spot money laundering and explain complex products to their clients in simple terms. Post office employees usually do not have any of these skills.

  Banks are also required to shortlist prospective borrowers and then underwrite loans. It is downright scary to allow post office workers doing these things even if they have been provided the requisite training.

Also, the banking sector itself is becoming competitive. Tech-savvy fintech companies are revolutionizing the way banking services are provided. It is difficult to see how post office employees will be able to compete with such services. At the present moment, post offices do not have any digital or mobile banking services and building infrastructure from scratch will be expensive as well as time-consuming.

Post offices do not have any other infrastructure which is commonly required by banks as well. In a post office, there are no vaults or any other security features which are mandatory for banks.

The bottom line is that turning a post office system into a bank is going to be an extremely challenging task. Even if somehow, the United States government was able to pull it off, there is very little guarantee that consumers might opt for such services.

It is quite likely that with the introduction of 5G, internet connectivity might become cheaper and widespread. Hence, rural customers might start using internet banking if the services are cheaper or better. The entire real estate portfolio which the United States post holds may become redundant in such a scenario.