Architect of Postal Banking Proposal Speaks Out
The U.S. Postal Service, well positioned to compete with payday lenders, could redirect the $7.4 billion Americans annually spend on these types of loans back into the U.S. economy. But it would have to become a proper bank to do so.February 13
The U.S. Postal Service offering financial services to the underserved would be a great idea. If the U.S. Postal Service weren't, you know, the U.S. Postal Service.February 10
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Bankers and their representatives harshly criticized a call for the U.S. Postal Service to offer financial products like debit cards and remittances to underbanked consumers, saying it was a dangerous and foolhardy idea.January 27
There are a lot of sides to Washington, and from David Williams' vantage point the nation's capital looks far different than it does to folks in the financial industry.
Williams has served for 11 and a half years as the U.S. Postal Service's inspector general. He runs an agency of more than 1,000 people, who in turn oversee more than half a million Postal Service employees. So far this month, his office has published reports on topics like same-day mail delivery and the money that the post office collects from foreign countries when it delivers overseas mail to U.S. residents.
To Williams and his colleagues, "too big to fail" might as well refer to an oversized package that's marked for urgent delivery. A "stress test" could be what happens when customers waiting in a long line at the post office lose their tempers.
So there's a big gap between the world Williams occupies every day and the realm he entered in January, when his office released a paper arguing that the Postal Service should start making small-dollar consumer loans and offering new ways for consumers to save.
The report's ideas were just as loudly panned by banking lobbyists as they were cheered by prominent congressional Democrats. "The paper received a lot of attention," says Williams, a native of the Midwest, in a typical bit of understatement.
In a recent interview, Williams shed new light on the origin of the January report, portraying the Postal Service as having been more involved in the project than the agency has acknowledged publicly. He made clear that he sees the payday loan business as bad for America. And he strongly defended his office's proposal, arguing that the Postal Service should partner with banks to serve rural communities and inner cities.
"Banks have left many areas of the United States. They've pulled back and closed their branches. They obviously didn't do that for any mean-spirited reason. They did it because they weren't able to pay the overhead and make it work. And the same has been true for the Postal Service," Williams said.
"If we joined together, we'd further pool overhead costs. And that would assure that in these areas," he added, "we continue to bind the nation together."
An Old Idea for a New Era
Plans for banking at the post office have a long history in the United States. They've never totally caught on, but also never really died.
The first proposals date back to the 19th Century. Between 1911 and 1967, the Postal Service offered savings accounts before a drop in deposits led to their discontinuation.
During the late 1990s, the Postal Service entered into a partnership with Citigroup (NYSE:C), the goal of which was to provide online financial services for small businesses. But the plan never took off. Today the Postal Service's financial-service products are limited to domestic money orders and international money transfers.
"The idea of offering financial services in post offices is something that has been talked about for a while," said Robert Reisner, a consultant who was the USPS's vice president of strategic planning from 1996 to 2001. "It's been very hard to create new services."
In 2006, it became even more difficult for the Postal Service to enter new businesses, because Congress tightened restrictions on its ability to offer non-postal services. If the Postal Service eventually decides that it wants to move into small-dollar lending, congressional approval would likely be necessary.
Inside the USPS IG's office is a unit called the Risk Analysis Research Center, which conducts research on how the post office should adapt to the 21st century. One example of the center's work, published last April, explored the potential benefits of geocoding ZIP code data, which has become far less relevant in the age of Google Maps.
Last year, the Risk Analysis Research Center began studying how the Post Office might help meet the needs of Americans who lack access to mainstream financial services.
The office retained a number of outside consultants, including James Pérez Foster, founder of Solera National Bank, a Hispanic-focused bank in Colorado. Foster declined to comment on the agency's report, saying that he is bound by rules that restrict the ability of contractors to comment publicly.
Williams, who has served as inspector general of five federal agencies, including the Nuclear Regulatory Commission, the Treasury Department and the Social Security Administration, cites two main factors behind his office's interest in adding new financial services at the post office.
One is the Postal Service's financial condition, which has improved in the wake of the Great Recession, but remains shaky. The other is the fact that 38% of the nation's post offices are in ZIP codes with no banks, and another 21% are in ZIP codes with only one bank. "It does seem odd that so many people lack these kinds of basic services," he said.
Exploring the Post Service's Role
After the report was released, and set off a firestorm in the financial industry, the Postal Service distanced itself from the IG's work. "It was definitely something that took us by surprise," a Postal Service spokeswoman said in February.
Postmaster General Patrick Donahoe telephoned Cam Fine, the chief executive of the Independent Community Bankers of America, and reassured him that the ideas in the report did not come from the Postal Service itself.
"He did say he was caught as much off guard by this proposal as we were," Fine recalled. "He went to great pains to say that he thought we have a perfectly fine banking system in the United States."
In his pique about the IG's proposal, Fine previously had taken some shots at the USPS. "The Postal Service is failing at doing the one thing it knows how to do delivering mail. What makes it think it could add financial services to its bag of tricks?" he'd written on his blog.
So during their phone call, Donahoe registered his objection to Fine's negative comments about the USPS.
"I called him because I was a little bit upset that he was really speaking in relatively poor ways about the Postal Service and our employees," Donahoe recalled during a recent interview.
Also in that interview, Donahoe expanded on his comments about the IG's report catching the Postal Service by surprise.
"The IG's an independent agency, and I think people need to keep that in mind. So I think sometimes people are under the mistaken notion that they do the Postal Service's bidding. That is not true. They do a lot of good work for us. This is one we didn't ask for. It came [as] a little bit of a surprise to us when we saw it," Donahoe said.
But Williams cast the U.S. Postal Service's role in his office's research in a somewhat different light.
"A lot of the people that we interviewed were Postal people, and they joined with us in helping to kind of think through it," Williams said. "It's true that when the paper was released, they had not seen it in its entirety, though we worked with them and spoke to them during the time of it."
A Risky Proposition
The inspector general's report contains two separate proposals, the first of which entails less risk for the Postal Service than the second.
The first proposal involves the sale of reloadable prepaid cards linked, perhaps, to direct deposit and online bill pay. If consumers paid an average of $15 per month in fees to use the cards, they could generate $1.2 billion in annual revenue, the IG's report estimates.
Williams said that a large percentage of American households currently lack access to any payment method that would enable them to make online purchases.
"We thought that was bad for the people," he added, explaining that prepaid cards from the Postal Service would give many consumers access to e-commerce. "And it also deprived commerce of an enormous sector of its customers," he said.
The second proposal is for the USPS to get into the small-dollar loan business. The IG's report suggests that the Postal Service could make profitable loans at much lower interest rates than payday lenders do.
But even some advocates of postal banking say it will be hard for the Postal Service to balance the twin goals of making a profit and providing affordable credit to consumers.
"If the main purpose is to make a profit, what kind of product are they offering?" asks Mehrsa Baradaran, a University of Georgia law professor who proposed post office banking in a 2012 law journal article.
The inspector general's report notes that Americans spent $89 billion on alternative financial services, such as payday loans and check cashing, in 2012. A lot of that money came from federal benefit checks, according to Williams. He expressed disapproval of the payday lenders who lend at high interest rates to government benefit recipients.
"I don't think it's the desire of the taxpayers that such a large amount of these benefits that are going from the federal and state governments to these recipients be diverted to predatory lending institutions," he said. "I think the taxpayers' hope was that it would all go to the person that was needy."
Williams' critics note that lending comes with risk. "You're not talking about private money," the ICBA's Fine said. "You're talking about governmental money on the line here."
Postmaster General Donahoe also voiced concern about the risks associated with the inspector general's small-dollar loan proposal.
"People can very quickly say things like, 'Well, there's a lot of money to be made on service fees,' Donahoe said. "But a lot of the service fees in that world are based on high risk levels."
The IG's report suggests the Postal Service could mitigate its exposure by partnering with banks that would hold postal loans on their balance sheets. Big banks, because of their broad geographic reach and deep pockets, would likely be better positioned than small banks to benefit from such arrangements.
This built-in advantage may help explain why the opposition to postal banking has been so strong among community banks. "It's not surprising that a smaller bank wouldn't be ready to launch a new service," says Reisner, the former USPS executive.
In the two months since the report was released, the Inspector General's office has met several times with congressional committees and with officials from the Postal Service.
"My conversation with the postmaster general and the other vice presidents there revolved around the fact that their plate is pretty full right now," Williams said, "and that they found it interesting, and they were anxious to see what Congress thought of the issue, and whether any of that was embraced in the upcoming legislation."
"I don't think you can turn something like this on suddenly, and they're keenly aware of that. But they did say they'd like to consider it. And we've had some sort of intense meetings with them following that, in which we had a lot of people in the room, sort of playing with ideas, and looking at possibilities as well as hurdles."
Perhaps not surprisingly, Postmaster General Donahoe sounded less enthusiastic about postal banking.
"It would be interesting to see if the IG continues to work on this, to flesh that discussion out a little bit more, but from our perspective, it's something that is not in our wheelhouse," he said. "The banking services, it's an interesting idea. I think that the concern that we have is that there's a lot more work that needs to be done here."
Congress holds a lot of the cards in this debate, but it appears unlikely to act anytime soon. One Democratic congressional staffer said that a postal reform bill probably won't pass until the Postal Service's financial situation worsens again.
"I'm not saying they're in great financial shape," this source said, "but the financial status is not dire enough for them to again cry wolf."
In the meantime, the IG's office appears to be preparing to do the work necessary to move its proposal beyond the concept phase.
Williams' current seven-year term as IG ends in 2017, and his office is well-insulated from the political blowback its proposal has sparked. So he doesn't seem likely to be cowed by those in the banking industry who object to what they see as an audacious expansion of the Postal Service's role in the economy.
"We haven't made a decision as to whether to do a follow-on report, but it wouldn't be unusual for us to explore the idea more deeply, particularly given the amount of feedback we've received on it," Williams said.
"If we did a second paper, and I think we might" he added, "it would have a great deal more specificity to it, and focus on implementation rather than a conceptual examination."