Post Office Offering Loans is 'Worst Idea Since the Edsel': Banks
The Postal Service could raise $8.9 billion annually by offering reloadable debit cards, loans, remittances and other financial services products that target the underbanked, according to a report issued Monday by the agency's Office of Inspector General.January 27
WASHINGTON Bankers and their representatives harshly criticized a call for the U.S. Postal Service to offer financial products like prepaid cards, remittances and even small consumer loans to underbanked consumers, saying it was a dangerous and foolhardy idea.
The agency's Office of Inspector General released a white paper Monday that said the cash-strapped Postal Service could earn nearly $9 billion annually by offering financial services to roughly 68 million consumers who are not served by traditional banks.
Although the white paper explicitly said the Post Office should work with local financial institutions not compete with them bankers and payday lenders reacted negatively to the proposal, saying it would pose significant risks to the system.
"Is this April 1?" said Richard Hunt, president chief executive of the Consumer Bankers Association. "The U.S. Postal Service should focus on profitably fulfilling its current mission delivering mail. This would be like the banking industry moving into running the airlines."
Their chief argument was that the Postal Service has struggled to make money in recent years, and faced numerous cutbacks. Allowing it to expand its business in the hopes that it might boost its balance sheet was a recipe for disaster, bankers said.
"You wouldn't have a FedEx and UPS [United Parcel Service] had the Postal Service been a model of efficiency and service, so you want to unleash that failed model on the financial system?" said Cam Fine, CEO of the Independent Community Bankers of America. "It's the worst idea since the Ford Edsel."
But not every type of lender agreed. In its white paper, the Inspector General envisioned the Post Office possibly competing with payday lenders by offering small-dollar loans paid via a reloadable debit card.
Ryan Gilbert, chief executive officer of Billfloat, a nonbank startup that makes small-dollar consumer loans, said that idea makes a lot of sense. He pointed to the Post Office's extensive retail distribution channel and its status as a trusted brand with potential customers.
"If you look at the location of the post offices, they are where the people are," Gilbert added. "And they've got thousands of customers a minute coming through their doors."
Jamie Fulmer, a spokesman for Advance America, one of the nation's largest payday lending chains, was also mostly upbeat about the idea, as long as the Postal Service operates under the same regulations as other lenders. "Our view of competition has always been the more the merrier," he said.
Former FDIC Chairman Sheila Bair, who has championed alternatives to payday loans for consumers, also said the idea shouldn't be rejected out of hand.
"We shouldn't automatically rule out any available options for expanding financial services to low-income families," said Bair, now a senior advisor to Pew Charitable Trusts.
But there were practical concerns with how the Post Office system would work.
As envisioned by the white paper, customers would be able to borrow up to half of their gross pay in a given pay cycle. For each paycheck, they'd be required to make installment payments equal to 5% of their gross pay until the loan was paid off.
The average repayment term would be five and a half months. A consumer who borrowed $375 would pay a total of $48 in interest and fees, equal to an effective annual interest rate of 28%.
Borrowers would put their paychecks onto USPS prepaid cards, often via direct deposit, which would allow the Postal Service to automatically withhold repayments before loading the balance of the paycheck onto the prepaid card.
The Postal Service might be able to secure a major leg up over private-sector lenders with respect to securing repayment from delinquent borrowers. Working with the Treasury Department, the USPS might deduct the amount owed from the borrower's tax refund, the paper states.
The kind of backstop could "serve as a built-in insurance policy that would significantly reduce the risk that Postal Loans would go unpaid," and allow the Postal Service to "offer loans to otherwise high-risk borrowers at affordable rates," the paper argues.
Yet allowing the Treasury to deduct payments from tax refunds could scare off potential borrowers, said Jennifer Tescher, president of the Center for Financial Services Innovation. She also raised concerns that many post offices have a reputation for poor customer service.
"I frankly find it difficult to see the Postal Service making this work," she said.
For its part, the white paper's authors seem intent on trying to pitch the plan to the financial services industry, which it said could earn substantial revenue in addition to the Postal Service. The paper said financial services firms could set up and manage web and mobile access for consumers; service the loans; and perhaps fund the entire program by buying the loans and holding them on their balance sheets.
"This could add up to substantial new revenue for the Postal Service's financial institution partners," the paper states.
The paper also pitches the plan as helping increase the underbanked's access to the financial system.
"The Postal Service could help financial institutions fill the gaps in their efforts to reach the underserved," the report said. "While banks are closing branches all over the country, mostly in low-income areas like rural communities and inner cities, the physical postal network is ubiquitous. The Postal Service also is among the most trusted companies in America, and trust is a critical element for implementing financial services."
Yet some consumer groups also appeared skeptical of the idea. Lauren Saunders, managing attorney at the National Consumer Law Center, praised the idea of providing cheaper small-dollar loans, but said the plan's particulars appeared at odds with guidance from federal banking regulators. The FDIC and Office of the Comptroller of the Currency recently finalized guidelines requiring banks to underwrite small-dollar consumer loans based on the borrower's ability to repay.
Saunders also argued that payroll deductions for loan repayments should not be mandatory, and she expressed concern about the potential use of a prepaid card to offer a lending product.
Banks, meanwhile, worried that allowing the Postal Service to get into this arena would effectively make it into another government-sponsored enterprise, such as Fannie Mae and Freddie Mac.
"The big picture concern is this looks like they're seeking to create the next GSE. In this case, in the postal service involved in banking products," said Ken Clayton, chief counsel for the American Bankers Association. "This could potentially create an uneven playing field" and "it raises a host of regulatory issues."
U.S. Post office representatives did not respond to questions in calls or emails.
The Postal Office already provides some money orders and international transfers so the white paper suggests that the agency first expand through those services and then look to products such as prepaid cards, small-dollar loans and online payment systems.
Although other countries, including Great Britain, Japan, Germany and New Zealand allow their post offices to engage in financial services products, the U.S. Postal Service dropped its savings system in the mid-1960s after offering it for roughly 50 years.
Banking groups argue that the foreign postal savings systems are far different since many other countries lack the amount of banking options that are in the U.S.
"There are thousands of financial service providers serving the underbanked and underserved and I think we can do a better job of serving the underbanked if we weren't crushed by regulations," Fine said. "But I think it's a myth that any quasi-government arm thinks it can do a better job of serving the underbanked than approximately 20,000 financial service providers."