Postal banking is a tough sell, and not just in America. Canada Post had to put a pause on its planned rural lending program after “irregular” activities involving “bad actors” created insurmountable processing issues for the program. Processing issues aside, Canada’s botched banking rollout has been under fire from many stakeholders. Advocacy group Democracy Watch, which generally supports postal banking, criticized proposed interest rates that amount to “gouging on the top end.” The C.D. Howe Institute think-tank has branded the program a “solution looking for a problem.” America’s mail carrier has much to learn from its northern neighbor’s uninspiring foray into postal banking.
The idea of mail carriers branching out into banking is a familiar one on both sides of the border. Prominent U.S. politicians such as Sens. Bernie Sanders (I-Vt.), Elizabeth Warren (D-Mass.), and Kirsten Gillibrand (D-N.Y.) have called for the U.S. Postal Service (USPS) to dabble in financial services such as loans and checking and savings accounts. As is the case in Canada, there’s little underlying coherence behind the proposal. Sens. Sanders and Gillibrand believe that postal banking could “provide critical revenue” while keeping loans “low-interest.”
In practice, it would be difficult to avoid Canada Post’s rates of “up to 20 per cent per year” to keep the books balanced. Loan delinquency rates and nonpayment tend to be higher in the low-income areas targeted by postal banking proposals, leading to higher rates to make up for losses. According to a 2020 study by the Bank Policy Institute, even responsible small-dollar loan programs can incur “a 10 percent overall cost of delinquency management and charge-off…” Add in other significant costs such as check verification technology and interagency regulatory compliance, and expenses for the USPS could easily climb into the tens of billions of dollars.
A couple of scenarios could very feasibly play out. USPS could raise interest rates to try and make up for annual losses. Or, the agency and lawmakers could decide that recouping losses via high interest rates are not a priority and heap any expenses onto the USPS’ mounting losses. Given that the agency is already projected to lose an additional $60 billion to $70 billion and eat through its cash reserves by 2030, this would lead to a fiscal catastrophe.
There’s no need to resort to hypotheticals to gauge the financial impact of postal banking. The USPS already runs a money order business where consumers can purchase a financial instrument that can be redeemed at any post office and some banks and stores. This proto-banking service has been faring poorly in recent years. According to an October 2022 report by the USPS’ Inspector General (IG), “Management continued to increase prices even though Postal Service money order prices exceeded those of its main competitors. Further, Postal Service money order costs exceeded revenue in three of the last five years…”
The money order business, then, represents the worst of all worlds for the USPS. The agency cannot keep prices competitive with the private sector, and despite the higher-than-average prices, cannot keep the books balanced. And, when the agency opts to set low prices for products such as packages, it rarely takes underlying costs into account. According to a 2022 analysis by the Taxpayers Protection Alliance, the USPS is likely underpricing parcels by billions of dollars per year.
The USPS simply lacks the know-how and market discipline for a successful venture into banking. America’s mail carrier should learn from its neighbor to the north, as well as its own experiences, and deliver mail, not banking services.
By Ross Marchand | Taxpayers Protection Alliance
Ross Marchand is a non-resident senior fellow at the Taxpayers Protection Alliance.
