Postal Banking – A Possible Payday Loans Alternative
While some consumers turn to payday loans to cover unexpected expenses, a growing group is now relying on the high-interest credit lines to supplement their inadequate income until the next paycheck. There are limited ways that people who do not have a financial cushion or strong credit history can access quick cash in a pinch.
The lack of short-term loan options to help Americans juggle economic disasters is spiraling into a controversial problem that is attracting the attention of consumer advocates and financial industry regulators. “The reality,” writes Mehrsa Baradaran in the Washington Post, “is that people need short-term loans and we have to find a way to provide credit that is safe and accessible.”
As the Consumer Financial Protection Bureau contemplates new proposed rules to reign in the shady practices that have plagued the payday loan industry, viable alternatives must be considered for filling the void in helping low-income consumers bridge the financial gap. Banks have chosen to step out of the industry, deeming the low-limit, short-term loans as too costly and risky to fund. One increasingly possible alternative to solving the problem of an equal credit market is for the federal government to provide low-cost postal banking.
The Case for Publicly Funded Credit
Public postal banking, savings and loans is not a handout or a revolutionary concept. The practice is currently in place in 51 countries and was even the standard from 1910 to 1966 in the U.S. An estimated 93 percent of postal institutions around the world provide primary banking services to more than 1 billion people, according to a 2013 report by the Universal Postal Union. Additionally, traditional loans issued by banks, credit unions and credit card companies are already subsidized by the government in the form of tax breaks and grants.
The U.S. Postal Service, America’s first and one of its largest bureaucratic institutions, already has a robust network of well-functioning branches and knowledgeable employees. It also already provides services beyond mailing and shipping that rival traditional bank products, including issuing money orders, facilitating international funds transfers and cashing U.S. Treasury checks. In theory, it would be a short leap for local branches to offer a wide range of transaction products, such as check cashing, account deposits and extending small loans.
Modernizing the Financial Services Industry
This model for short-term lending has the potential to remedy a significant banking disparity and fulfill a growing market demand while supplying credit at a reasonable price. In the process, straightforward basic services could be offered at a much lower price point than banks charge, which costs low-income consumers an estimated 10 percent of their earned wages.
Consumers Union notes that millions of Americans are feeling the burden of rising penalties for overdrawing their accounts and paying “maintenance fees” because they are not able to maintain a high enough balance. The average cost of a checking account, which continues to rise, is now at $218 per year. In contrast, the median payday loan consumer pays $458 in fees for 10 transactions in 12 months, points out a white paper by the Consumer Financial Protection Bureau.
Banking requirements and fees prevent roughly 12 million Americans from having access to checking accounts, which is essential to affordably cashing paychecks, paying bills on time and building a savings safety net. The Post Office has the infrastructure to provide basic banking accounts that charge reasonable service fees, waive minimum balance requirements and offer short-term, low-limit loans.
Advocacy for Postal Banking Gaining Ground
Consumer advocates and financial reform groups are reexamining the viability of postal banking options to help consumers with cashing checks, accessing free ATM services and tapping payday loans. The effort is supported by the Postal Service’s inspector general’s office, which is grappling with ways to save the outdated shipping service. The move could help implement fair regulations while also pumping an estimated $8.9 billion each year into the financially struggling agency.
As powerful political pundits, such as former presidential candidates Sen. Bernie Sanders and Sen. Elizabeth Warren, have voiced support for the cause, the American Postal Workers Union is currently petitioning the federal agency with more than 150,000 signatures in its Campaign for Postal Banking. Even though the postal service’s core function in the modern era is not banking, union President Mark Dimondstein told the LA Times that this move could be a sound solution to circumventing predatory lenders.
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