I like the proposal put forward by research staff at the US Postal Service to get back into banking. I think it could help to bring more access to financial services to lower-income communities. But it
would be a shocker if the Post Office became the institution that managed to find a means to put credit back on to prepaid cards.
Yesterday the Office of the Inspector General of the United States Postal Service (pdf) released a white paper outlining the opportunity it sees to provide a variety of financial services. The paper identifies a variety of possible product offerings. Of interest, all are the kinds of non-bank services that reach underserved consumers.
The OIG's paper outlined eight areas:
- Direct Deposit (to a Post Office prepaid debit card)
- Prepaid cards (see above)
- Bill payment
- Money Orders
- Small Loans
- Mobile Transactions
- International Money Transfers
The Post Office already sells money orders and money transfer services. But until 1967, the Post Office offered deposit accounts.
There is clearly a fit here. There are post offices in almost every town in the United States. Small communities adore their post office. Most are located in prominent downtown spots. They have good parking. Short of when someone "goes postal," they tend to be safe and secure. One of the problems with free ATM networks is that many are located inside convenience stores, and as a result there is little on-street signage to help consumers find them. People trust the Post Office.
Nonetheless, post offices are not a panacea. Our downtown branch closes is only open for five hours a day and it is closed on Saturday and Sunday.
Of all those offerings, the two most significant are small loans and prepaid cards. The white paper lays out the terms of a hypothetical "Postal Loan" here:
- 28 percent interest.
- Repayable in installments. Minimum repayment of 5 percent of monthly gross pay.
- People can borrow up to half of their paycheck.
- Available after two consecutive direct deposits.
- Social Security and disability benefits payments can qualify.
- Defaulted loans could possibly be collected from tax refunds.
I imagine that smart program managers and card issuers will scramble to get this contract. While even the Post Office would not match up with the opportunity to be in Wal-Mart, it could easily be as valuable as a position on the racks at a major drug store. If the Post Office signed an exclusive agreement, then it would be even better.
In fact, the Postal Loan would - to some extent - become the national demonstration project for Pew's Safe Small-Dollar Loan Project proposal. I qualify that statement because Pew has never suggested that anyone should collect loans from federal benefits payments.
In fact, this is probably one of the most suprising elements of the whole paper. Collecting automatic repayments from federal benefits is an EFTA no-no. Does the OIG think that his institution could bypass that rule?
Any reaction to the idea of putting credit on a prepaid in 31,000 retail locations would be tempered if the CFPB approves small-dollar credit on the prepaid platform. In that new environment, the Postal Loan would probably emerge as a reasonable alternative. For now, there is no regulatory cover for it, but the playing field could change before summer 2014. If the CFPB were to approve it, then the impact of the Postal Loan would largely be to demonstrate that a sub-36 percent interest installment credit product could be financially viable.