Sunday, March 30, 2014

USPS Seeks Financial Lifeline Serving the Underbanked

Postal bank services truck
Here's a conversation the time for which has come: allow the U.S. Postal Service (USPS) to offer financial services. It's not a novel idea. After all, USPS already sells postal money orders and prepaid cards. Also, post-office banks (known as postal giros) have been operating in Europe for centuries, although most were spun off as separate entities in the late twentieth.

That was about when USPS began struggling for its financial life. Now, under pressure from Congress and the public, USPS (a quasi-governmental agency)is taking a page from history(and the Walmart playbook)as it considers strategies for partnering with banks to help reach the financially under-served.

The notion was officially broached in a recent report out of the USPS Inspector General's Office, aptly titled Providing Non-Bank Financial Services for the Underserved. The report emphasizes that USPS isn't looking to replace banks. "To the contrary, we are suggesting that the Postal Service could greatly complement banks' offerings," the report states. As banks continue closing branches, especially in rural communities and inner cities, the USPS has a ubiquitous physical presence. "The Postal Service is also among the most trusted companies in America, and trust is a critical element for implementing financial services."

As noted, USPS already sells money orders and prepaid debit cards. So what other financial services might be offered? Loans - an alternative to the much maligned payday loan - seem to be a top priority, but also might be the most difficult to get authorized. Legislatively, USPS is excluded from offering non-postal services. The IG's report, however, suggests that because money orders and prepaid cards are effectively postal services now an argument can be made to support an expansion into other financial services. But credit services are quite different from transaction services, so it would seem a stretch.

Nonetheless, USPS believes it could significantly undercut the fees charged by payday lenders, pawn shops and the like. Loans would be tied to a multipurpose postal card - akin to a prepaid debit card - and borrowers would need to have paychecks loaded onto the cards. But the cost benefit would likely far outweigh any inconveniences. Using $375 - the average payday loan amount - the report calculates a Postal Loan would take 5.5 months and $48 in fees and interest to pay off, compared to 4.5 months and $520 in fees and interest for a payday loan.

Federal Consumer Watchdog on the Case

Payday loans have become highly controversial. And now the Consumer Financial Protection Bureau (CFPB) has made it clear that these controversial loans are on the federal government's regulatory radar. CFPB says it has found through surveys that 4 out of 5 payday loans are rolled over or renewed within 14 days. In fact, just 15% of borrowers payoff their loans without re-borrowing, and 20% default on at least one loan.

"We are concerned that too many borrowers slide into the debt traps that payday loans can become," CFPB Director Richard Cordray said in announcing the findings. And he promised change. "As we work tobring needed reforms to the payday market, we want to ensure consumers have access to small-dollar loans that help them get ahead, not push them farther behind."

USPS just might be one answer.

Monday, October 7, 2013

State, Federal Crackdowns Targetting Online Payday Lenders Intensify

State and federal regulators are turning up the heat on companies making payday loans online and claiming they are immune from laws against such loans because they are operated by Native American tribes.

Last week, Arkansas Attorney General Dustin McDaniel announced a "consumer protection lawsuit" against three companies and two individuals accused of colluding to offer payday loans online at usurious rates to Arkansans and falsely claiming tribal affiliation.

Saturday, September 21, 2013

Fighting Global Poverty through More Inclusive Payment Systems

Can electronic payment systems be adapted to improve access to financial services in the developing world? A new report from the Bill & Melinda Gates Foundation says Yes, and that it can be done in a manner that benefits all stakeholders.

Fighting Poverty Profitably: Transforming the economics of payments to build sustainable, inclusive financial systems., (.pdf) prepared by the Gates Foundation and McKinsey & Company, provides an extensive analysis of the economics of payment systems around the world and concludes that costs associated with operating these systems could be slashed by as much as 90% simply by going digital. Plus, these systems can be made more efficient, sustainable and accessible to the poor, while also boosting revenues for financial services providers, the report states.

There are 2.5 billion people in the world who live on less than $2.50 a month; and only 16% of these people have access to formal bank accounts.

"Poor families have incredibly complex financial lives, but the tools available to them to manage their finances don't match up," said Roger Voorhies, Director of the Foundation's Financial Services for the Poor program. "People need affordable, efficient and secure ways to send and receive money, and this report shows how this can be achieved, especially through digital transactions that can reduce costs by up to 90%."

The report draws on lessons learned in developed countries (like the U.S.) that highlight how digital payments are cheaper, more efficient and ultimately more sustainable, and they create potential new revenue opportunities for banks and other financial services providers.

Here are some key findings highlighted in Fighting Poverty Profitably: Transforming the economics of payments to build sustainable, inclusive financial systems:

  • Digital payment systems offer the highest potential for financial inclusion. The are more efficient and can reduce transaction costs by up to 90%, plus offer more opportunities for revenues from additional products and services.
  • There are no perfect systems - payment systems in all countries have the potential to lower costs and broaden access.
  • Models where fees are based on customer activity are best suited for sustainable access.
  • Innovations hold increasing potential for improving payment systems as new technologies, revenue sources and models emerge.
  • The highest levels of financial inclusion are in countries where access to digital payments is widespread. In those countries where at least 70% of people pay digitally, financial inclusion exceeds 85%.
  • To foster financial inclusion, regulation should focus more on systemic issues and less on individual financial institutions.