End predatory lending with postal banking
Payday loans hurt America’s poorest people
Imagine needing a loan of $300 to cover an immediate expense, but you, like 42% of American households, do not have any savings. Would you be willing to pay upward of 600% interest on a short-term loan?
For those of us fortunate to never have considered such a dilemma, the idea seems pretty ridiculous. But for others, there are few options. As Mehrsa Baradaran titled her book, this is just one way how the other half banks.
As a way to obtain short-term cash, over 12 million Americans take out loans at over 20,000 payday loan shops in the United States. Exorbitant fees make loans difficult to pay back — so borrowers typically need a second loan to pay the first, then a third, etc., sparking an endless spiraling debt trap. A full 80% of payday loans are taken within two weeks of a previous loan. Lenders have direct access to a borrower’s bank account. Payday loans are marketed as short-term cash for an unexpected expense, like a medical emergency, but in reality, 7 in 10 borrowers use the loans for rent or utilities.
The payday loan industry’s exploitation of poor people, and disproportionately people of color, is widely understood. Americans spend $9 billion annually on fees alone. Payday loans are banned in 18 states and Washington D.C. But, eliminating payday loans will only make it harder for poor people to access short-term cash. Rather, we should consider cheaper alternatives — that have secondary benefits on the lack of banking access in America.
This is an issue of economic justice. Last week, the Trump administration rolled back an Obama-era rule proposed on payday dealers, that required them to ensure borrowers can pay back their loans and limited the amount of times a shop could withdraw directly from a borrower’s bank account. Black and Latinx advocacy groups condemned the move.
Payday loans are just one method to conduct financial business by those those underserved by traditional banks. One in four Americans does not have full access to the banking system. Poor Americans, disproportionately low-income and people of color, lose additional money on cashier’s checks or wire transfers, that could be free if they had full bank access. For the 20 million “unbanked” Americans without a bank account, a full 10% of their income might go toward the added costs of using their money.
From an economic standpoint, why do payday loan shops charge exorbitant fees, in a free market? First, while it’s expensive to lend money on short terms, payday loan shops charge the maximum rate allowable by law, not market rate, because they know borrowers cannot easily shop around. The second reason for high fees is maintaining the shops themselves — literally keeping the lights on — which amount to two-thirds of payday loan shop expenses. Evidently, people need to visit the payday loan shop to use it — that’s why there are more payday loan shops than McDonald’s in the United States. Even in an age of mobile and online banking, 86% of “banked” households reported visiting a bank over the year.
Call it socialism, moral capitalism, or a welfare state — low-income communities should not need to pay exorbitantly to use the financial system, and they are equally entitled to use it as everyone else (the bailed-out banks, especially). How can we help poor households access credit without the high costs of payday loans? Developing localized, community credit unions is one way. But there is already an existing physical infrastructure, with 59% of its locations in zip codes with one or zero banks. That’s right — post offices!
How postal banking fits in
With nearly 31,000 post offices nationwide, postal banking gives people access to basic financial services, including checking and savings accounts, and short-term loans, in their own community. Rather than falling into a debt trap from payday loan interest rates, people can take out small, modest-interest loans. The purpose is not to replace actual banks, so there is even a maximum dollar amount allowed in a checking or savings account. The main purpose of postal banks is lowering the cost of using money, particularly for low-income communities and people of color. In turn, they will spend more money on actual needs and not excessive debt and loans.
Postal banking is a less glamorous item in the progressive policy agenda, mentioned by Alexandria Ocasio-Cortez, Bernie Sanders, and Elizabeth Warren. Last year, Kirsten Gillibrand even introduced a postal banking bill in the Senate. Still, it is not exactly a galvanizing issue for Democrats. Though, most other developed nations have some form of a postal bank for basic financial services. That used to include the United States, which had a postal bank from 1911 to 1967.
Gillibrand’s bill proposes post office services now include:
- Small dollar loans — up to $500 at a time, $1,000 within 12 months of first loan — with an interest rate in line with one-month Treasury bill yields, which are currently hovering at 2.43%.
- Checking & interest-bearing savings accounts — with a $20,000 maximum balance.
- Transactional services — including access to ATMs, online checking account, check-cash services, direct deposit, and mobile banking.
- Remittance services — the ability to send or receive money from domestic or foreign recipients.
I cannot imagine adding bank services to the post office workloads would be particularly costly, especially as the majority of payday loan shop expenses go toward maintaining facilities. Post offices might increase the number of shifts for part-time employees or hire an additional employee, but for the most part, it appears to be a fiscally mute venture.
Along with easing the financial burden of the poorest Americans, postal banking can jumpstart the U.S. Postal Service. Popular reporting on the excesses of government cite that USPS continual annual losses in recent years, but that is largely a result of a 2006 change made by Congress that required USPS pre-fund future retiree health insurance, costing billions each year. Nonetheless, postal banking allows the USPS to creep back toward profitability. Postal banks would not really affect the traditional banking sector, but it would upset the payday loan industry, dramatically undercutting their margins. I would argue that society can do without an industry predicated on profiting off of spiraling debt traps of poor people.
Postal banking is a needed public service, going much beyond displacing the problematic payday loan industry. Even Americans with banks or in rural areas may stand to benefit from the expanded credit access offered by postal banks. It is not a dramatic change that uplifts poor Americans into a better standard of living, but it is a step toward access and opportunity. As such, it is necessary to highlight postal banking as an issue of justice, public service, and democracy. Freedom means the right to conduct financial business with autonomy.
