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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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January 19, 2021

Can the USPS Improve Financial Inclusion?

During the nationwide discussion regarding the distribution of the personal economic impact (stimulus) payments, the subject of having the United States Postal Service (USPS) offer basic banking services again surfaced—an idea that has been raised numerous times in the recent pastOff-site link. The premise is that the USPS, with its 34,000-plus retail locations, could provide a convenient and low-cost financial services channel for the estimated 7 million unbankedOff-site link and 24 million underbankedOff-site link households.

As I began to research this issue, I was surprised to learn that the USPS had provided savings deposit accounts in the past. In 1910, Congress created the Postal Saving System, which began operating on January 1, 1911. The program was designed to get money being held by families into circulation. It found particular favor with new immigrants who were familiar with postal office savings programs in their native countries. An individual could open a savings account with a minimum of $1 (equivalent to approximately $27 today), later raised in 1956 to $5. However, to help customers save lower amounts, the program offered a postal savings card. Customers would purchase postage savings stamps in 10 cent increments and affix them to the card. Once the customers accumulated stamps worth at least $1, they could deposit the card or redeem it for cash.

Initially, the maximum account balance was $500, but that was raised to $1,000 in 1916 and then to $2,500 in 1918. And until May 1916, the deposit limit was $100 per month. Interest was paid on the account at the rate of 2 percent. The USPS deposited the funds in local banks and earned 2.5 percent. The post office used the difference to cover the cost of the operating the program. In her book How the Other Half Banks, author Mehrsa Baradaran writes that the postal savings program "was the most successful experiment in financial inclusion in the United States. More effective than any other philanthropic or mutual effort to bank the poor, postal banking brought millions of new immigrants and rural dwellers into the U.S. banking system all at once. One of the central aims of the postal banks was also the most difficult to measure: teaching habits of thrift and saving to the poor."

At its peak during World War II, the program's deposits reached $3.4 billion ($40.6 billion today adjusted for inflation) with more than four million depositors. As interest rates paid by financial institutions after the war exceeded the rate of the USPS savings program, the program's popularity began to decline. It officially ended on July 1, 1967, with about $50 million in unclaimed deposits that was later turned over to states for holding and distribution under escheatment rules.

Today, Japan and a number of EU countries have successful postal banking programs. On the other side of the coin, Canada stopped its century-old postal banking program in 1969.

In 2014, the USPS Office of Inspector General issued a white paper, "Providing Non-Bank Financial Services for the Underserved Adobe PDF file formatOff-site link," that identified specific services that the USPS could partner with a financial institution on to offer reloadable prepaid cards, domestic and international money transfers, and possibly small dollar loans. The USPS today issues domestic and international postal money orders and cashes postal money orders and U.S. Treasury checks with certain limitations.

So what does the USPS management have to say about offering banking services? This 2016 statement still appears on their website.

The Postal Service's mission is to provide the American public with trusted, affordable, universal mail service. Our core function is delivery, not banking.

To the extent our research concludes that we can legally provide additional services at a profit and without distracting from our core business, we would consider these. However, public policy and regulatory discussions must be addressed before the Postal Service invests in an area outside our core function.

Advocates for the USPS offering financial services argue that providing these basic banking services could be a win-win situation for unbanked/underserved consumers and also bring in additional revenue for the agency. An Atlanta Fed white paper (September 2020) titled "Digital Payments and the Path to Financial Inclusion" lists public banking as a potential option for increasing financial inclusion. What do you think?