The United States Postal Service is now one step closer to becoming a financial institution.
In January 2014, a white paper from the USPS's Office of the Inspector General suggested that by allowing the post office to offer banking services, it could help communities that are currently underserved by banks.
Now, a new white paper from the USPS’ Office of the Inspector General lays out a series of distinct paths that would allow the post office to enter the banking and financial services sector.
“The financial services industry is experiencing a period of tremendous change. Banks are closing branches in communities across the country for many reasons, including the rise of mobile banking and the emergence of new players in the payments space,” the USPS-OIG states in the white paper.
“This has created a vacuum that leaves many consumers without access to adequate financial services. More than a quarter of households in this country either do not have a bank account or have an account but also rely on alternative financial providers such as check cashers and payday lenders, which sometimes seek to take advantage of Americans living on the financial fringe,” the report continues.
“The financially ‘underserved’ families living in those households tend to be working class and have low income,” the OIG report states. “In addition, they spend significantly more time and money just to take care of simple, everyday transactions like paying bills or cashing their paychecks than most families do. When it comes to financial services, it is actually more expensive to be poor.”
In the white paper, the USPS-OIG suggests five different approaches for the post office to expand into financial services.
The first is to expand on its existing services. “Under its current legal authority, the Postal Service could beef up and modernize its money orders and international remittances, and launch market tests for adjacent services such as bill pay and expanded check cashing,” the OIG report states. “The impact of this approach on the underserved would likely be smaller than that of other approaches.”
The OIG report lists the relative revenue, relative cost, benefits to the underserved and operational complexity of each proposal on a scale from low to high, and the expansion of existing services is on the lower end of each OIG metric.
The second approach would call for the post office to establish “one key partner” to work with in expanding into financial services.
“Financial services could be expanded through one key partner, likely a diversified player that offers money transfers, prepaid cards, bill payments, and perhaps even loans and deposit accounts,” the OIG report states. “The right partner’s expertise could streamline operations and implementation, but the Postal Service may have limited flexibility to design and price products for maximum affordability.”
Again, the relative revenue, relative cost, benefits to the underserved and operational complexity of this proposal are on the lower end of the OIG’s scale.
The third proposal is for the post office to engage with “multiple partners” to offer different financial products.
“The Postal Service could choose a different partner for each product,” the OIG report states. “While working with specialized providers can lead to better, more flexible products, it could make implementation and operation more complex and the products less integrated than they would be with a single partner.”
The relative revenue, relative cost, benefits to the underserved and operational complexity of this proposal are all in the middle of the OIG’s scale, suggesting increased revenue, increased costs, increased benefits to the underserved and increased operational complexity.
The fourth proposal is for the post office to become a financial services marketplace.
“The Postal Service could become a distribution point for the financial products of a broad array of providers, including banks, credit unions, and non-bank financial companies,” the OIG report states. “While this marketplace could bring scale to innovative, consumer-friendly services, a large pool of providers could make the program operationally challenging.”
The relative revenue of this proposal is on the lower end of the OIG’s scale, while the relative cost, benefits to the underserved and operational complexity of this proposal are all towards the higher end of the OIG’s scale, with operational complexity at the highest level allowable on the OIG’s scale.
The fifth and final proposal is for the post office itself to become a licensed bank.
“For the Postal Service to become a licensed bank focused on the financially underserved, it would require a long and likely arduous effort,” the OIG report states. “While a Post Bank could advance financial inclusion significantly through deposit accounts and loans, the costs and regulatory burdens that would come with it could make this approach more risky than others.”
The relative revenue, relative cost, benefits to the underserved and operational complexity of this proposal are all very high on the OIG’s scale, suggesting significantly increased revenue, significantly increased costs, significantly increased benefits to the underserved and significantly increased operational complexity.
The OIG notes that this is “perhaps the most aggressive” approach the post office could take in this case and is not recommending this course of action, but chose to include it in the report to address potential questions about the depth and breadth of financial services that the post office could offer.
"Establishing a post bank could have the largest impact on financial inclusion, bringing significant numbers of underserved families into the financial mainstream,” the OIG report states.
“As a bank, the Postal Service could take customer deposits and use them to fund loans, giving it maximum ability to affect financial inclusion. While the Postal Service offered bank accounts through the historical Postal Savings System (1911 to 1967) and many posts abroad operate as licensed banks, getting a new bank charter might require many years of arduous effort to overcome political, industry, and regulatory obstacles,” the OIG report continues.
“The potential revenue from this approach could be significant. However, if the Postal Service were to succeed in becoming a bank, the risks, costs, and regulatory burdens that would come with it would pose tremendous challenges,” the OIG report states.
“For starters, the Postal Service may have to retrofit offices, hire significant financial expertise, build internal systems on a massive branch network, raise billions of dollars in capital, and bring in a staff of compliance managers,” the OIG said, noting that the uncertainties and downsides make this approach “less viable” than other approaches, at least in the short term.
Click here to read the full white paper from the USPS-OIG.