How the U.S. postal service could live on as a payments hub

The 2020 election has tossed the U.S. Postal Service under extreme scrutiny, pressuring the institution at a time when it has become a potential catalyst for financial inclusion.

The Trump administration has alleged shortcomings in mail-in voting, aligning with cuts to postal activity and political altercations. Two main highlights are the House’s vote to allocate $25 billion to the USPS to shore up its finances and ban operational changes that have slowed mail delivery — a measure that has no chance of advancing past the GOP-controlled Senate or gaining Trump’s signature. The other is reports that JPMorgan Chase is in discussion with the USPS to offer ATMs, cash support and other financial services by leasing space in the postal network.

A USPS spokesperson said the post office offers limited financial services such as money orders and U.S. Treasury check cashing, adding the USPS would consider other services it can legally provide at a profit, but regulatory discussions must be addressed beforehand. The bank did not return a request for comment by deadline.

As online banking and e-commerce accelerate during the coronavirus pandemic, the cost of managing paper money has become a challenge for the government, consumers and banks. For banks, cash creates labor costs and expenses in distribution, maintenance and processing, according to McKinsey, adding the rapid digitization of payments compounds that expense.

Bloomberg News

The postal service can offset some of that overhead and expense, said Corey Stone, entrepreneur-in-residence at the Financial Health Network.

“Cash management is another part of what bank branches do that can be performed at a USPS location, as they’re already accepting cash for postage, money order and transfers,” Stone said.

There are examples of both the opportunity and challenges in using the postal network to address underserved markets or ATM deserts.

In the U.K., Barclays briefly pulled out of an agreement between the postal service and banks to provide cash withdrawals at post offices, following a disagreement in the fall of 2019 over interchange rates. Fees for postal banking are higher than at branches or ATMs, and the banks must absorb these fees as the service is free for consumers. In the U.K., less than 3% of the population is unbanked, according to Statista. About 6% of the U.S. population is unbanked, according to the Federal Reserve, but another 16% is considered underbanked, meaning they have a bank account but mostly use an alternative service.

The decline of branches creates an additional problem. The U.K. lost a third of its bank branches between 2015 and 2019, according to the Financial Times. This trend has accelerated during the pandemic.

The U.S. has seen a similar trend, as bank branch closures strain access to ATMs and cash services that could be provided by the USPS — or higher-fee options such as check cashing businesses.

A deal between banks and the USPS to support cash access could encourage banks to broaden consumer bases without opening more branches, and could also potentially benefit merchants that have not upgraded to accept digital payments.

“The U.K.’s postal money is a national model open to all banks, enabling any consumer with an existing bank account to conduct basic in-person transactions and ATM transactions at U.K. post office locations,” Stone said.

Distribution partnerships, in which banks and credit unions partner with non-financial retailers, can lower the cost of brick-and-mortar delivery by using another party’s existing real estate and staffing, Stone said. “Post offices are located in virtually every ZIP code, including in those where traditional bank branches are absent,” he said.

The services can also add volume and new lines of business for the postal service.

In some markets, postal banking has become digital. In Italy, Postepay recently hired financial messaging company Volente Technologies to power the post office’s move into open banking, instant payments and a gateway to interbank networks. Post Italiane has more than 14 million accounts and is one of the largest e-money services in Italy, with more than 28 million cards in circulation.

In Australia, the national postal service has partnered with Mastercard on a digital ID project that combines information from a user’s mobile device and other authentication methods. The Australian postal service offers branch banking through extension agreements with banks, as well as bill payment.

While there has not been much political support for postal banking in the U.S., the economic crisis that’s accompanied the pandemic has exposed the shortcomings in mass funds disbursement. Along with discussions of a central bank digital currency comes the potential for the USPS to play a role — though there are differences of opinion on how that should happen.

B. Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions, has argued for more of a role for credit unions to provide a diversity of options for cash support at the USPS.

Eric Grover, a principal at Intrepid Ventures, said, “The post office leasing space and/or earning fees from private-sector banks offering services at USPS sites would be a win all around.”

Such a move would bolster the post office’s shaky financials, generating fees from partner banks and possibly generating additional traffic at post office branches.

“Banks would have access to an additional retail distribution channel," Grover added. "And many consumers would find using an ATM or visiting a mini bank branch co-located with the post office convenient.”