Should Post Offices Revive Banking Services?

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Long before payroll cards or prepaid debit, there was the U.S. postal system.

Beginning in 1910, and lasting more than five decades under the authorization of Congress, U.S. post offices offered savings accounts, targeting those who today would be referred to as the unbanked. The government hoped this option would be seen as an attractive alternative to cookie jars and mattresses, which so many people, distrustful of banks, favored at the time—particularly immigrants and the working class.

Deposits peaked at nearly $3.4 billion in 1947—$32.8 billion in today's money-before a confluence of factors, including higher interest rates available from banks and U.S. savings bonds, sapped the Postal Savings System of its popularity, leading the program to cease operations in 1967.

Half a century later, the U.S. Postal Service itself is in financial trouble. Could its saving grace be a revamped effort to help people in similar straits?

Ben Jackson, a senior analyst at Mercator Advisory Group, thinks so. He sees an opportunity for the USPS to sell banking products, especially to the 40 million U.S. households that are either unbanked or underbanked.

"Politically, I think that it would be easiest to say, 'We're going to be the depositor of last resort just to kind of help these people get their act together,'" Jackson says.

He argues that the Postal Service already has a lot going for it as a financial services provider. Despite years of belt-tightening measures, there still are nearly 32,000 post offices nationwide. Even Bank of America sounds small in comparison, with its roughly 5,700 branches.

The post office staff already is trained to interact with the public, to deal with private information and to handle money orders, having issued 116 million of them in 2011 with a value of $22.4 billion.

The USPS also has experience with prepaid cards, which have become increasingly popular in recent years with the unbanked. Some of them view prepaid as a practical alternative to traditional checking accounts and a way to avoid surprise fees.

From 1996 through 2006, the Postal Service offered reloadable prepaid cards. And in June 2011, it started a pilot program selling American Express gift cards. These one-time-use cards, carrying an activation fee of $3.95 to $5.95 depending on the amount on the card, are currently in about 5,000 post offices. More than 175,000 cards have been sold so far.

But perhaps the USPS's most compelling qualification for becoming a financial services provider, Jackson says, is that people not only trust the Postal Service but are "very emotionally attached in a strange way" to their local post office. "Those are the people who bring you your checks in the mail," he says. "Those are the people who bring you your Christmas cards."

The public outcry that recently derailed a proposal to close 3,700 rural offices attests to the strong attachment people have. In an era of Occupy Wall Street protests, that kind of esteem is golden.

But the USPS's chief financial officer, Joe Corbett, says the agency has explored offering banking services and found the return would not make a big enough dent in its multibillion-dollar budget deficit to be worth the effort.

In other countries where financial services are offered through the post offices—even Japan, where the practice is well established and quite profitable—those services bring in only about 7 percent of total operating revenue, Corbett says. "And only about 10 percent of a bank's revenue actually falls to the bottom line, so you would be talking about a very small addition to our profit, even if we successfully become an average-sized bank in a very short period of time."

Corbett says pursuing financial services would only be a distraction to the USPS in executing a proposed financial plan that would lead to a modest profit by 2014. The effort includes things like reducing service from six days to five days a week, adjusting work hours to better suit demand and working with Congress to change legislation that caps postage rates.

From the perspective of bankers, Corbett's position on the idea is just as well: government-backed competition would not be welcome.

"Banks have enough problems with taxpayer-subsidized competition as it is now, in the form of the credit unions and the farm credit system," says Bert Ely, an independent banking consultant with Ely & Co. in Alexandria, Va.

But Mercator's Jackson points out that the USPS getting into financial services could potentially benefit the banking industry as it did under the Postal Savings System. Back then, the law required that the post office redeposit most of the money it received from consumers into local banks, where it earned 2.5 percent interest. The post office paid its depositors 2 percent interest. The half-percent difference was intended to cover the cost of operating the Postal Savings System.

Bankers generally opposed the government initiative at first, but warmed up after realizing that many people who previously stashed their spare cash at home had started buying into the idea of a savings account.

Jackson concedes there would be challenges with introducing financial services through the Postal Service. For example, while he mainly sees the agency's many locations as an advantage, there would be an expense associated with outfitting all those locations with the infrastructure needed for distributing new products.But partnering with a financial services provider potentially could reduce the startup cost. "They don't necessarily have to build something from scratch," Jackson says. "They could white-label it."

Still, Ely is skeptical. "A lot of post offices are really busy and have long lines. My theory is as they cut back on the number of post offices and try to cut costs, the window service at the post office is going to get even worse."

But perhaps the biggest obstacle to the post office selling banking products is political. Even getting prepaid cards into its lobbies was an uphill battle. "You would think that would be a slam dunk, but nonetheless it took intense discussion and finally approval by our regulators before we were allowed to do that," Corbett says.

Corbett is hopeful that, with legislative support, the USPS can get back in the black within a few years. And then it's anyone's guess whether banking at the local post office might be a possibility, provided the financial services sector isn't quite as crowded with competitors as it now, he says.

"In five years, if the landscape is different and we're at an operating profit, nothing's off the table if it makes sense," Corbett says.

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