Sunday, March 30, 2014

USPS Seeks Financial Lifeline Serving the Underbanked

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.


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