One important note of caution: the Postal Service should be very mindful to ensure that no partnership damages its reputation. The level of trust the Postal Service has earned from the public is an unmatched asset, and one that should not be jeopardized.
Billions More for the Poor
The white paper notes that more than a quarter of all US households do not have a bank account, or use costly services like payday loans and check-cashing exchanges just to make ends meet. People who filed for bankruptcy in 2012 were on average just $26 per month short of meeting their expenses, so even modest savings would make a major difference to them:
The average underserved household has an annual income of about $25,500 and spends about $2,412 of that just on alternative financial services fees and interest. That amounts to 9.5 percent of their income. To put that into perspective, that is about the same portion of income that the average American household spends on food in one year. In 2012 alone, the underserved paid some $89 billion in fees and interest.
Banks are closing branches all over the country, mostly in low-income areas; but post offices are still to be found everywhere. They could offer affordable financial services that would save the underserved billions of dollars in exorbitant fees and interest.
Postal Loans could be made for less than a tenth of the fees charged for a typical payday loan of the same size. The example is given of a $375 loan paid off in 5-1/2 months. A typical payday lender would charge annual interest of 391%, for a total of $520 in interest and fees. For a comparable Postal Loan, the borrower would pay a $25 upfront loan fee and 25% interest, making the total for interest and fees a mere $48 across the life of the loan. The white paper concludes:
If even one-tenth of the 12 million Americans who take out a payday loan each year got this hypothetical Postal Loan instead, they could collectively save more than half a billion dollars a year in fees and interest. And that is to say nothing of the benefits Postal Loans could bring to the 10 million unbanked U.S. households which cannot even get payday loans.
The proposed Postal Loan could save these marginal borrowers about $100 per month, potentially saving them from bankruptcy.
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The Questionable Credit Union Alternative
Palast argues that his credit union can give the same loan for 10%, but this is doubtful. In a fall 2012 article titled "Are Payday Lending Markets Competitive?", Victor Stango shows that credit unions, despite their claims, are generally not able to offer competitive payday loans. Few credit unions even offer them, because both credit unions and borrowers themselves find the credit union version unattractive. Stango's survey found that borrowers actually preferred the higher-priced payday loans, because they had fewer restrictions.
Banks do not generally make small personal loans, even to creditworthy borrowers, because they are not cost-effective for the bank; and the underserved often cannot get credit cards because they have bad or nonexistent credit histories, making them a high credit risk. They therefore turn to payday loans, on which credit unions do offer lower rates; but they can offer them only by being more restrictive on approval and repayment terms and by adding fees. More restrictive terms mean credit union payday loans have lower default risk; but risk-adjusted prices on standard payday loans, says Stango, may actually be no higher than those on credit union payday loans.
The National Credit Union Administration allows an APR of 28% on short-term small loans. Lenders can't really afford to do it for less, because there are so many defaults.
As for big banks licking their chops at getting in on the USPS' 25% short term loans, this hardly seems likely either. Big banks, including Wells Fargo, Bank of America and JPMorgan Chase, are already major funders of payday lenders--the ones in the 391% bracket. The USPS returns will seem paltry by comparison.
Profits to the People
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