By Andrew Vahrenkamp
Free checking is dying. Banks are reducing their branch networks, with 93% of the closures occurring in zip codes with with below-average incomes. Transitioning to digital channels is leaving those Americans without access to technology behind. As we noted last year, 7% of Americans are unbanked.
It’s no wonder that some in Washington are looking for alternative solutions to banking delivery. Their eyes have fallen upon an institution with locations already built across the country: the United States Postal Service.
This idea is by no means new, as the USPS offered the Postal Savings System for 56 years, from 1911 to 1967. At its peak in 1947, more than four-million Americans had nearly $3.4 billion on deposit with the USPS. That’s about 3% of the population with a little over 2% of all deposits. Today, that market share would be equivalent to PNC Bank, the fifth largest bank in the country.
So, we’re not talking about an insignificant program. At the time of its founding, consumers distrusted banks – frankly with good reasons. With no federal deposit insurance or government backing, banks needed to charge particularly high rates on loans and minimal rates on deposits to cover their losses. And if that capital wasn’t enough, the bank would fail, wiping out the depositor. Small wonder that so many Americans kept their money in mattresses, where at least it would still exist. Postal banking was a way to encourage those funds to enter the economy.
After World War II, as more and more consumers grew comfortable with the FDIC and NCUA and banks and credit unions were able to offer rates commensurate with what the USPS offered, demand for postal banking fell.
Now, some senators and think tanks are pushing to restore it as an alternative to banks and payday lenders. Consider this a “public option” for banking.
One can see the appeal: an already existing branch network of 30,000 locations, a government-funded charter, and a track record of success in other countries, including the UK, France, Japan, Italy, and developing nations such as Brazil and India.
According to the bill submitted by New York Senator Kristin Gillibrand, the new Postal Bank would only be able to offer loans up to $500 and $1,000 per consumer per year. The only deposits would be checking and saving accounts up to $20,000. As David Lazarus writes in the Los Angeles Times, “the Postal Bank would serve more as a safety net than a true competitor to private banks.”
But would consumers consider the post office for such work? Here are a couple of data points. First, as we learned in our inaugural Brand Benchmarking Study in 2017, the US Postal Service has undergone a remarkable transformation in its brand perception. Sixty-six percent of consumers tested rated the USPS favorably, right in line with Nike, Coca-Cola, and Starbucks (all at 65%), and well ahead of Wells Fargo (33%), Bank of America (35%), and Congress (12%).
Second, as part of an upcoming Raddon Research Insights study on Technology and Banking, we asked consumers, “If the following companies/organizations were to offer banking services, how likely would you be to bank with them?”
What The Research Showed
The data show that 13% of consumers said they would be very or extremely likely to use the USPS for banking, including 20% of millennials. While that 13% might seem low compared to the 25% showing that degree of enthusiasm for PayPal, the Postal Service gets better reviews than Apple, FedEx, Target, or any of the cell phone companies.
What would consumers want from a Postal Bank? Payments. Checking account, debit card, and credit card all top the list.
Note that this research was conducted among consumers currently using banking services at traditional institutions, yet even here, there is significant demand for basic payments services to be available at non-traditional sources. No matter which non-traditional provider they preferred (PayPal, Apple, Google, Amazon, Walmart), consumers were looking for a payment account, a debit card and a credit card above all.
Here’s the blunt reality. We live in a world in which electronic payments have become the dominant method. According to the Federal Reserve, card payments accounted for 48% of all retail payment transactions, and electronic methods like bill pay and ACH represented an additional 11%, while cash represented only 32%.
With the decline of free checking, consumers without the ability to pay for a payment account are effectively shut out of participating in the economy. Consumers with intermittent or no online access are also impacted. According to our latest deposit research, 27% of American households have fewer than $1000 in deposits at any institution. Can these consumers afford to pay $72 per year to have access to a payment account with debit card? Should they?
Consumers Will Find a Way
Banks and credit unions can and likely will lobby to kill Sen. Gillibrand’s bill. But they should examine the long-term trends. Today’s payment system resembles a utility, something which in the minds of many, all consumers ought to be able to access.
If banks and credit unions cannot effectively and efficiently offer access to this payment infrastructure to all consumers, then either Washington or other companies will find a way to do it.
Andrew Vahrenkamp is senior research analyst with Raddon.