The payday loan industry preys on the poorest working Americans, who take cash advances and often find they can never catch up with debts that keep spiraling higher. In much of the United States, payday lenders reap huge profits by charging triple-digit interest rates and high fees, all the while sending borrowers into an inescapable cycle of debt.
In Massachusetts, strict regulations have kept payday lenders mostly at arm’s length. The federal government will soon follow suit, with proposed rules and tighter lending standards issued by the Consumer Financial Protection Bureau. Yet even if the new rules eliminate the payday loan industry, they won’t cure the fundamental problem: the lack of access to credit for the working poor.
It’s the absence of adequate short-term or emergency credit that payday lenders have exploited. That’s why the bureau’s new regulations should go hand-and-hand with a government-sponsored plan to expand credit on reasonable terms.
Senator Elizabeth Warren has pushed for the postal service, with its locations in virtually every community in America, to expand its offerings to include basic banking services, such as bill-paying, check-cashing, and low-cost small loans. Payday lenders defend their existence by saying their services are vital for people who find themselves in a financial bind — yet there’s no reason those same services can’t be offered by a government institution at affordable interest rates.
In countries like the United Kingdom, Switzerland, and Japan, postal offices already offer banking services, and many make good profits from it. In fact, USPS itself offered a savings program for more than a half-century until 1967.
So while the idea is not new, the recent focus on payday lending should bring renewed attention to this sensible proposal, which was outlined in a report issued last year by the postal service’s inspector general.
The money-losing Postal Service certainly could use a profit center. But if transforming a struggling bureaucracy into a quasi-financial institution proves beyond the imagination of policy makers, the private sector should — and will — find a way to serve the market. Retail giant WalMart, for instance, has already expanded into financial services, starting with a partnership with American Express.
Check-cashing stores, payday lenders, and other predatory financial services operations are used by mostly low-income individuals who paid them a staggering $89 billion in interest and fees in 2012, according to the inspector general report. This sizeable and needy market includes the 8 percent of households in the United States that have no access to the mainstream financial system and another 20 percent of households that do use traditional banks, but also resort to these unscrupulous financial providers. A national crackdown on payday lenders is overdue, to be sure. Yet the dearth of credit among millions of low-income Americans won’t go away, and the government should be part of the solution.