Are prepaid debit cards and small-dollar loans the answer to the financial woes at the U.S. Postal Service? Maybe, according to the agency’s watchdog.
The Postal Service inspector general issued a report this week recommending that the agency expand its financial services to meet the needs of underserved communities. Researchers estimate that the agency could earn $8.9 billion in annual revenue if it captured 10 percent of the interest and fees generated by the 68 million Americans on the fringes of the banking system.
Those dollars could reverse years of losses at the Postal Service, which has struggled in the face of waning demand and a congressional mandate to pre-fund retiree health benefits.
But there are formidable barriers facing the agency. Any changes to the business would require congressional approval, a Sisyphean task considering the contentious political wrangling over the future of the Postal Service.
Financial services is nothing new for the Postal Service. The agency has long provided money orders and international money transfers. It used to offer savings accounts, a service that ended in 1967 as banks gained a greater edge by offering higher interest rates. In the 1990s, the agency issued prepaid debit cards that never caught on with consumers.
The market for financial products, especially reloadable prepaid cards, has changed. The use of those cards has soared in the wake of the credit crisis that has pushed millions of Americans outside of the traditional banking sector. The most recent data from Mercator Advisory Groups show that Americans loaded $192 billion onto prepaid cards in 2012, triple the amount in the preceding five years.
Retailers and big banks have latched on to the product, but the Postal Service’s ubiquitous network, with 32,000 locations, could give the agency an edge, according to the inspector general’s report.
“The physical presence is already there to serve the needs of Americans,” said Charles Crum, an economist in the inspector general’s office. “Also, the Postal Service is not beholden to shareholders to maximize profits” so it could keep fees low.
Another area ripe for expansion is small-dollar lending, according to the report. The inspector general’s office said loans could be made available to people who have their paycheck directly deposited onto a Postal prepaid card. Consumers could borrow up to 50 percent of their paycheck at an effective annual interest rate of 28 percent, a fraction of the triple-digit interest rate that payday lenders typically charge, according to the report.
But any such move would likely face stiff opposition from banks, which are struggling to retool their small-dollar lending platforms under regulatory scrutiny.
“We’re deeply concerned that the U.S. Postal service is trying to drive the creation of a new [government-sponsored entity] engaged in banking services, which is not subject to the same level of regulation,” said Ken Clayton, chief counsel of the American Bankers Association, a lobbying group.
“This new entity could be perceived by many as a government-endorsed and preferred provider of financial products,” he said. “The impact on banks already serving these communities would be substantial.”
The Postal Service has not endorsed the inspector general’s report, and agency officials said they are still reading through the recommendations.
The Postal Service has fought to stabilize its finances. The agency, which has posted $26 billion in net losses since 2011, pressed regulators for an emergency postage rate increase last year to offset its diminished revenue. The bid for a permanent rate hike was unsuccessful as regulators would only agree to a 24-month increase. The decision is being battled in the courts.
Meanwhile, the Postal Service is waiting for lawmakers to make a move on bipartisan legislation in the Senate to change the agency’s payments toward retirement benefits and Saturday delivery. House Democrats and Republicans have failed to reach a consensus, leaving little hope that any significant changes will come this year, experts say.