New legislation has been announced by Senator Kirsten Gillibrand of New York, which would utilize branches of the U.S. Postal Service to provide basic banking services to the public.
While this may sound like a strange proposal to individuals who live in areas where banking is conveniently available, it addresses critical needs felt in other parts of the country. Data suggests that many of our nation’s households still struggle with financial exclusion. Nearly 20% are underbanked, which means that in the past year they were forced to use high-priced financial services from an alternative source such as a payday lending business. And about 7% are unbanked, meaning they don’t even have a simple checking or savings account.
This is concerning because it means that more than a quarter of households lack access to mainstream financial services. If these individuals have a check to cash, they’re unable to simply go to a nearby bank or credit union. Instead, they’d likely have to go to a high-priced check cashing service.
The pressures are exacerbated when financially excluded individuals need to borrow money. Consider that the average payday loan basically comes with the equivalent of a 400% annual percentage rate (yes, you read that correctly).
Faced with these outlandish fees, financially excluded households spend about 10% of their income on financial services. Saddled with oppressive fees, many individuals see no other option than to get another loan to repay the last. Thus, a cycle begins where 80% of payday loans are merely previous loans rolled over into the latest version.
Because it’s not as profitable for banks and credit unions to serve low-income groups, those are the branches that typically close down. Consider that of the 5,000 branches that closed between 2009-2014, more than 90% were in areas where the income levels fell below the national median.
While some states are cracking down on payday lending and the other financial services that inevitably creep into these areas, that really doesn’t solve the problem. It’s only suppressing bad options, after all, not providing good ones.
Senator Gillibrand’s proposed legislation would help provide better financial solutions in these areas where they’re currently not available. The bill would make it possible for individuals to open bank accounts at their local post office. Additionally, there would be loans available with fair and competitive rates.
Whether or not this public bank service becomes a reality, it’s an innovative concept. By leveraging the existing infrastructure of the USPS, it would create access to financial services where it has traditionally been absent. Indeed, every zip code would have its own location, creating a comprehensive new element in the financial landscape.