Postal Banking Fails to Reach the Unbanked

By Nicholas Anthony of Cato.

"Members of the Center for Monetary and Financial Alternatives have long argued that proposals for postal banking fundamentally misunderstand the case of the unbanked. Yet, the proposals pushed forward, and a pilot program was launched in September.

What are the results so far? Over the past two months, no one has chosen to use the service at the Bronx location, according to postal employees.

If a full‐​scale postal banking program is to be launched, Congress itself would need to enact legislation. Therefore, the pilot program was only launched in four locations across Baltimore, Maryland; the Bronx, New York; Falls Church, Virginia; and Washington, D.C. The program allows customers to transfer business and payroll checks up to $500 to gift cards for a flat fee of $5.95.

Shortly before the program’s September 13th launch, Senator Kirsten Gillibrand (D‑NY) said, “This is a great first step toward creating a postal bank. [The] pilot program will demonstrate the value to these communities, and show that the USPS can effectively service underbanked urban and rural communities.”

Yet, after two long months of being in operation, it seems that these communities have found value in other services. Across the country, Walmart cashes checks up to $1,000 for a fee of $4.00. And just a few minutes down the street from the Baltimore Post Office, Check Cash Depot cashes checks for a fee of 1% ($5.00 for cashing a $500 check). So not only is postal banking failing to bring new offerings to the market, but it is also failing to do so at a more affordable price.

Who Are the Unbanked?

Before seeking to help the unbanked, policymakers should stop to understand who the unbanked are and why they are unbanked in the first place. The FDIC’s 2019 financial services survey is a great place to start. The FDIC estimates that 5.4% of U.S. households are unbanked. In other words, there are approximately 7.1 million households where no one has a checking or savings account at a bank or credit union.

In addition to the standard demographic questions, the FDIC asked the unbanked two important questions: (1) are you interested in having a bank account, and (2) why don’t you have a bank account? To the first question, 75% of the respondents said they were simply uninterested in having a bank account. And for the second question, respondents offered eleven different reasons for why they were unbanked. Noticeably, inconvenient bank locations––one of the core reasons supporters use to justify postal banking––is ranked nearly last (see Figure 1).

Figure 1 shows that to get the unbanked interested in having a bank account, a solution must address the difficulty in maintaining minimum balances. Similarly, a solution needs to tackle individuals’ lack of trust in institutions and their desire for financial privacy. Postal banking addresses none of the leading issues and the issue it does address––namely, convenient locations––is far from critical.

An Experiment to Learn From

Paul Merski, of the Community Banks of America, told NBC, “This is just a bad idea that doesn’t seem to want to go away.” While Merski is certainly correct, this experiment should leave no question: Unless there is a huge uptick in usage, postal banking is not the panacea its advocates claim it to be. Rather, postal banking is one idea better left in the past.

Note: Although the American Postal Workers Union reported that the other locations have “yielded transactions,” only the Baltimore location was able to be reached by phone to confirm they have had some users of the program."