Use of these services is more common in Black, Hispanic and Indigenous families than in white or Asian homes, according to FDIC officials. People who use these services are more likely to get stuck in debt, even spending up to 10% of their annual income on fees and interest – paying hundreds or thousands of dollars to access their own money, the dollars they earned.
Postal banking services would clearly benefit rural communities, which often have a higher population of black and indigenous residents and poor white residents.
In states like Alaska and Montana with high percentages of Native Americans and Alaska Natives, rural residents could handle their money at their local post office instead of traveling hundreds of miles to the nearest bank branch. A local post office is geographically more convenient than a bank for black residents in the rural south and for poor white residents of states like Ohio and West Virginia.
Banks are too expensive
Affordable banking options allow people to deposit or cash their paychecks — or government assistance checks, like coronavirus rescue payments — cheaply, easily, and conveniently. This helps them keep more of their own money and manage their finances.
But many Americans — whether or not they have bank accounts — worry about the costs and fees associated with depositing money in a bank. About 1 million black households do not have a federally insured bank account, with more than half citing costs as the reason, according to the FDIC. Seven million black households use a bank account in combination with check cashers and payday lenders, according to the most recent federal data. Many Native American, Hispanic, Asian, and poor white households have similar banking experiences.
Private banks earn an increasing share of their money by charging fees for maintaining a minimum account balance, cashing a check, or withdrawing cash from an ATM. In 2001, banks earned 14% of their money this way, but in 2018 these fees accounted for 25% of private bank revenue.
The burden of these fees falls unequally on black customers, who pay about $190 more per month in account fees than white and Asian customers. The fees also hit lower-income families harder, as they are usually flat rates that cost higher-income customers a smaller percentage of their income.
When you know better…
Other countries offer a cheaper option with widespread public access – and the United States did too.
From 1911 to 1967, the U.S. Postal Service operated a banking system out of post offices across the country, allowing people to cash checks and deposit money in interest-bearing accounts. At the height of the system, nearly 4 million Americans held $3.4 billion in the Postal Savings System. Even now, the Postal Service continues to sell $21 billion in money orders each year.
In September 2021, the Postal Service launched a limited postal banking pilot at four post offices – in Washington, D.C.; Baltimore; the Bronx, New York, and Falls Church, Virginia. Customers can cash checks for up to $500 at post offices, loading the money onto gift cards that can be used for online or in-person purchases. The service costs a flat rate of $5.95, regardless of the amount of the check. These costs can be expected to remain low, or even decline, as the Postal Service only needs to break even, rather than demonstrate shareholder benefits.
The pilot program is expected to expand not only to other post offices, but also to additional services such as bill payment and ATM cash withdrawals. Consumer advocates argue the Postal Service can offer retail financial services at lower costs than private banks, check cashers and payday lenders.
Now that Biden has signed the Postal Service Reform Act of 2022, postal banking services could become both permanent and available at all of the country’s more than 30,000 post offices.
Among various other efforts to shore up the Postal Service’s financial position, the law would authorize the service to cash checks, establish checking and savings accounts, and help send money — beyond the option current postal order. Post offices could also provide small loans at much lower interest rates than payday lenders.
The law does not require the Postal Service to add more financial services, but many consumer advocates are urging the organization to do so, saying it will attract many more customers than the pilot has so far .
Terri Friedline is an associate professor of social work at the University of Michigan and author of “Banking on Revolution: Why Financial Technology Won’t Save a Broken System.”
Ameya Pawar is a Special Advisor at the UChicago Inclusive Economy Lab, Principal Investigator at the Economic Security Project and 2020 Fellow at the Open Society Foundations.