Postal Bank Idea Resurfaces, Would Be A Gut Punch To Payday Lenders

U.S. Sen. Kirsten Gillibrand (D-NY), who is thought to be considering a run for president in 2020, has proposed legislation to create a postal bank.

The bill (S. 2755) would allow all U.S. post offices — more than 30,000 locations — to act as retail banks, which would pose a direct challenge to the existing payday lending industry.

Gillibrand, in announcing the proposal, was clear that one purpose of a postal bank would be to destroy payday lending.

"The Postal Bank would effectively end predatory payday lending industry practices overnight by giving low-income Americans, particularly communities of color and rural communities, access to basic banking services that they currently don’t have," the senator said in a statement. 

"The lack of access to traditional banking services makes it nearly impossible for low-income Americans to escape the cycle of poverty because they are often forced to spend large percentages of their income to cash their paychecks or pay back high-interest predatory payday loans."

Postal banks are not a novel idea. Victorian Britain invested in such a system in the mid-19th century as modern postal delivery got underway. Banks at the time catered mainly to wealthy customers. 

Most modern European countries offer postal banking, as do Japan, China, South Africa and other countries. Canada used to operate such a system, and so did the United States, from 1911 to 1966. 

Initially, in the U.S. system, savings earned 2.5% interest, according to a postal service history, but it didn't include lending. 

“Although bankers first viewed the Postal Savings System as competition, they later were convince d that the Postal Savings System brought a considerable amount of money out of hiding from mattresses and cookie jars,” the USPS history said.

Lack of consumer interest eventually doomed the U.S. system. The only vestige of banking at post offices is postal money orders.

A modern version of a post office bank “could benefit the 68 million underserved Americans who either do not have a bank account or rely on expensive services like payday lending and check cashing,” said a post office inspector general report issued in May 2015. “The products also could help the Postal Service generate new revenue to continue providing universal service."

A postal bank resurrection is periodically proposed. Gillibrand is merely the latest to do so, following Bernie Sanders and Elizabeth Warren in recent years. A call for such a system was even a plank in the 2016 Democratic platform, but so far the idea hasn't gained much traction.

The payday loan industry dismisses the idea. Though the Community Financial Services Association of America, the industry's trade group, hasn't commented on Gillibrand's proposal, it did comment on the idea around the time the postal inspector's report was released. 

A 2015 association statement, as reported by the Washington Post, said that “we welcome increased competition in the short-term credit marketplace." But presumably not from the USPS, since the statement also said, "the private sector remains the best opportunity for serving small-dollar, short-term loans.”