America's Sweetheart and America's favorite cranky old coot paired up to talk up the idea of turning the Post Office into a banking system for the under-served. To cur to the spoiler: After roughly an hour with Google and my Sixers, I am confident that the advocates, including Sen. Kristen Gillibrand and the US Post Office team, have failed to understand the numbers and the revenue opportunity they are tossing about and are talking about $89 billion when $30 billion is nearer the mark. $30 billion is not a trifle, but its not $89 billion either. And that sort of easily discovered error does not do much for my confidence in the quality of the research effort by the advocates.
And what is it with these progressives anyway? They want the government to have all our medical information and now they expect people (many of whom have, well, documentation challenges opening a conventional bank account) to trust the government with their financial information and savings? Do they know who is President or did Bernie forget?
Today's buzz was Tweeted by "Take On Wall Street". Let's toss them the mic:
A Public Option For Banking
It’s time to stop relying on the big banks and predatory lenders, and expand access to fair consumer banking services through “a public option” like postal banking and public banks.
Postal Banking
Regulating abusive and aggressively marketed products is important, but more can be done to broaden access to high-quality, low-cost financial services. As many as 8 million American households don’t have access to basic banking, like a checking account, and 1 in 5 Americans don’t have access to affordable accounts, debit cards, and credit. The big banks no longer offer free checking, and fees for basic banking have skyrocketed.
Worse still, nearly 28% of U.S. households rely on fringe and often predatory financial institutions for banking and credit. Fees to payday lenders and check-cashers cost these households an astonishing $89 billion a year. That’s more than $2,400 per household, or 10% of their average income. These predatory services are concentrated in low-income neighborhoods and communities of color, stripping additional wealth from those who can least afford it.
The U.S. Postal Service (USPS) is well placed to provide such basic banking services. In past decades, the USPS offered savings accounts on a significant scale, and postal systems in countries around the world currently provide financial services to more than a billion consumers.
Keep on eye on that $89 billion figure and we will segue to Sen. Gillibrand, unveiling her 2018 legislative proposal:
Kirsten Gillibrand Unveils A Public Option For Banking
The idea would provide a low-cost alternative to payday loans — and it might just save the Postal Service, too.
Sen. Kirsten Gillibrand (D-N.Y.) is introducing legislation Wednesday that would require every U.S. post office to provide basic banking services, an ambitious step aimed at improving the lives of Americans with limited financial resources.
The bill brings to Congress for the first time a policy idea that has already won the support of liberal economists and anti-poverty activists: Turning the nation’s sprawling network of U.S. Postal Service facilities into places where working-class and low-income Americans who lack adequate access to commercial banking can obtain low-cost, short-term loans. Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have both spoken out in favor of postal banking, but Gillibrand is the first to introduce legislation mandating it.
The central goal of the bill is to replace risky financial products like payday loans, which can trap borrowers in prolonged cycles of debt, with regulated alternatives.
Do note "short term loans", such as payday loans. And let's say hello to an old friend as we learn how this will save the Postal System:
A postal banking system could be a major boon to the financially strained Postal Service. If even 10 percent of the money Americans currently spend on interest and fees for risky financial products went toward postal banking loans that cost 90 percent less, the Postal Service would gain almost $9 billion in annual revenue, according to a 2014 study conducted by the Postal Service Inspector General.
Here's their White Paper and yes, the "almost $9 billion" in new revenue comes from 10% market share of an $89 billion market as of 2012. Now, one might want to ask why the Sen. Gillibrand and the US Post Office hope to take in ten percent of an outrageous, exploitative, predatory market. Shouldn't their revenue be much less?!? Don't ask.
The Post Office White Paper describes their proposed product offerings in detail but this description from Slate captures the spirit:
If Democrats do try to bring back postal banking, there are two main ways to do it. First, would be the basic approach: The post office could simply offer low-dollar checking accounts and debit cards, to make sure every American has affordable access to the absolute essentials of financial services. That would be a relief to the millions of households with no bank account today, and might not even be that much of a political lift—after all, the Postal Service would be catering to customers that Bank of America and Wells Fargo seem mostly uninterested in these days. This approach wouldn’t dramatically change the face of American finance; it would assist the unbanked, but less so the much larger group of underbanked.
The more ambitious approach, which Gillibrand and other Democrats have embraced, would be far more seismic. Gillibrand’s bill would allow the postal service to also make small loans at low interest rates and would almost certainly compete payday lenders out of business. The bill states that postal banks could make loans of up to $500 at a time at interest rates in line with the yield on month Treasury bills, which today is sitting at a low 1.65 percent. That rate of interest is probably too low given how many of these loans will likely default. The Postal Service’s Inspector General report pictured interest rates closer to 25 percent, which would still save customers hundreds of dollars compared to payday loans that commonly come with APRs around 400 percent.
And now the reveal: Here is the study describing the $89 billion opportunity by CFSI:
Serving the underserved market : Market Size Study
They have a beautiful depiction of the market, below.
The possibly-not-obvious problem? The biggest market segment - $49.6 Billion - is automobile and other installment loans that go beyond the scope of the Post Office White Paper and the Gillibrand proposal. Oops.
Payday loans are included in the green column on the far left (as well they might be!). However, the $21.4 Billion total there includes Pawn shop loans of about $5 B, payday loans (internet and storefront) and overdraft protection on checking. The Post Office won't be running a pawn shop, so let's subtract that and say that $16B is left.
The orange "Payments" column of $8.9B looks good, as does the $4.7 B for checking and savings services. Tax preparation services and debt settlements for $4.2B? I don't think so. Take it out.
So totaling up the services the Post Office actually hopes to offer gets us to $16B (payday) + $9B Payments +$5B Checking/Savings, or roughly $30 Billion of market opportunity. 10% market share is $3 billion. Nothing to sneeze at, but not the number advertised.
So how great an idea is this, anyway? In an attempt to approach reality from a different direction, a UPenn professor, Lisa Servon, actually worked in a check cashing store and talked to customers about their background and motivation (Crazy, amirite?). Her thoughts are summarized here; a snippet:
It didn’t even seem clear to people studying the banking industry as to why people would ever use a check-cashing service. Surprisingly, it turned out that there were reasons:
Servon was surprised by what people told her. Over and over, Servon heard and observed that check cashers often met customers’ needs better than banks did.
She discovered there were three main reasons people used these services instead of banks: cost, transparency, and service.
She got a book out of it as well.
From yet another perspective, the Japanese had a more extensive Postal Bank with huge private savings. A 2005 Parliamentary campaign was oriented towards privatizing it. Apparently this institution had become cozy with crony capitalists and politicos. Who could have seen that coming?
Based on the proposal and target market I don't foresee the US Post deposits becoming huge so that predictable problem shouldn't arise. Or, limit their investments to Treasury bills. Time may tell!
Worse still, nearly 28% of U.S. households rely on fringe and often predatory financial institutions for banking and credit. Fees to payday lenders and check-cashers cost these households an astonishing $89 billion a year.
Well, no. As noted, payday lenders are much less than that.
The $100 billion a year Alternative Financial Services (AFS) industry has flooded the communities where the underserved live with products, services and practices that are expensive and often predatory. Each year, the average underserved household spends $2,412 – nearly 10 percent of gross income – in fees and interest for alternative financial services...
The $100 billion is for a different year. However, they have looked at a similar report!
The AFS industry includes:
- Check cashing services
- Payday lenders
- Auto title loans
- Pawn shops
- Rent-to-own stores
- Tax refund anticipation loans
OK, they noted auto loans and installment sales of bigger-ticker items. And they claim the public spends $7 billion a year on payday loans, which looks a lot like the numbers in the green column from the 2012 study. This group might be worth reading.
As to Sen. Gillibrand, I'm not sure. Her
website includes this:
The Postal Bank would effectively wipe out predatory payday lending industry practices because low-income workers would be able to take out low-interest, small-dollar loans from the Postal Bank instead of being forced to rely on predatory payday lenders. High-cost, predatory financial products like payday loans cost the average underserved household 10 percent, or $2,412, of their gross income in fees and interest. This adds up to about $100 billion of lost savings for low-income families across the country, and results in diminished funding for rent, food, and childcare, as well as an inability to build credit. Under Gillibrand’s bill, any American could o pen an account at the Postal Bank.
Payday loans are the tip of the iceberg. I don't know whether she is hiding the ball or is sincere and ignorant.
Further dabbling suggests I can send money to Italy for an $8 fee. Same to Mexico. Presumably varies by country but I'm done for now.
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