That’s a statement on page twelve of the 2016 Democratic party platform. At first I thought it was a joke—a little humor injected into an otherwise boring and predictable document. But apparently the Democrats are quite serious about this absolutely terrible idea.
First of all, the Post Office already tried being a bank. From 1911 to 1966, it operated the U.S. Postal Savings System at every one of its brick and mortar locations. At the peak of its popularity in 1947 it had about $3.7 billion in deposits—about $39 billion in today’s dollars. In other words, today it would be the 43rd largest bank by deposits. Deutsche Bank, with only four U.S. locations, holds roughly the same amount of American deposits.
The Postal Savings System—signed into law by a Republican president and eliminated by a Democratic one, by the way—failed for a variety of reasons. Some historians believe the rise and acceptance of federal deposit insurance made commercial banks just as safe as post office banking. But perhaps the real reason was its lack of competitiveness. When it was abolished, the Postal Savings System’s customer base had decreased markedly, and that’s because while it paid 2 percent on deposits, savers could earn more than 3 percent at normal banks and S&Ls.
Today, of course, the financial services market is dramatically different than in 1966. The Democratic platform plank pushed by Elizabeth Warren is actually built on a 2014 report prepared by the USPS Inspector General. With the Post Office losing somewhere in the neighborhood of $5 billion a year, the IG report proposed entering the banking business as way to grow itself out of losing money. Really? How is the core competency of the USPS—delivering mail—a transferable skill to the financial services industry? By that logic why not have McDonald’s go into the banking business and throw in Pizza Hut as well? Between them they have as many locations as the Post Office.
The very idea that having a lot of physical locations provides some type of economies of scale doesn’t make any sense in today’s technology-driven world. A recent Pew Research Center report on banking shows that well over half of all bank customers exclusively use either their computer or cell phone for all of their transactions. And that same report identifies that a third of those earning less than $25,000 per year also bank online exclusively. That makes sense because a recent study by the FDIC reported that those in the lowest income bracket are more likely to have a smartphone than the general population at large. Branch banking at brick and mortar locations is slowly dying and the Post Office is foolish to think its 30,000 buildings are a competitive advantage. Those locations would be more like an albatross.
Another of the big sales pitches for reviving the Post Office Bank is to serve the un-banked and under-banked segment of the population with deposit and loan products. But there’s a reason low-income people don’t have bank accounts: They don’t have any money to deposit in them. The reality of living paycheck to paycheck is that there isn’t any money left to stash in a savings account.
Instead, the poor tend to use prepaid debit cards as their deposit accounts. For example, American Express offers a prepaid debit card that only costs $5 to establish, carries no monthly fees, has free direct deposit, lets users withdraw cash at over 24,000 locations for free, offers free monthly bill pay, and pays a cash back incentive on purchases. Even beyond the question how the USPS could offer a competitive product to this, why would anyone stand in line at the Post Office to use it?
Let’s look at the one remnant of the Postal Savings Bank that the USPS still operates—the sale of money orders. Today you can go into any post office and buy a money order up to $500 for only $1.20, or up to $1,000 for $1.60. That’s sounds pretty cheap and it’s probably because of the Post Office’s 30,000 locations providing economies of scale, right? Once again, however, even this maddeningly simple banking task is horribly mismanaged by the USPS. Walmart, with only about 10 percent of the locations as the Post Office, sells all of their money orders, regardless of amount, for a flat $0.70 each—about half of what the Post Office charges.
We haven’t even touched on the other Democratic banking proposals for the Post Office, like providing small loans—think payday loans—to low income individuals. Looking at the government’s track record in the student loan arena we can all predict how that proposal would turn out. No, the Post Office should just stick to losing billions of dollars delivering the mail—it’s quite good at both—and leave high finance to the Walmarts of the world.
Kevin Cochrane teaches economics and business at Colorado Mesa University, and is also a Permanent Visiting Professor of Economics at The University of International Relations in Beijing.
