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The next-level idea for making banking cheaper and easier

The post office might be the fix for the racial gap in managing our hard-earned cash

The post office might be the fix for the racial gap in managing our hard-earned cash.H. Hopp-Bruce/The Emancipator/Nadia Snopek/Adobe

Reviving postal banking would help the U.S. Postal Service advance racial equity and offer Americans new options for lower-cost financial services, so they could more easily – and cheaply – manage and use their hard-earned money.

More than 60 million Americans – one-fifth of the population – live in communities without a bank. They’re left either to travel long distances to handle their money or use more expensive nearby options like check-cashing companies, payday lenders and currency exchanges. An ongoing experiment, backed by a proposal signed into law in April by President Joe Biden, to allow banking at post offices could change that.

Check-cashing services charge fees of between 2% and 6% of the amount of the check, or more. At payday lenders, where many people go to get access to their money if they need it before actually receiving their next paycheck, the average annualized interest rate on short-term payday loans is 391%.

Using these services is more common in Black, Hispanic and Native families than in White or Asian homes, the FDIC officials say. People who use these services are more likely to get trapped in debt, even spending as much as 10% of their annual income on fees and interest – paying hundreds or thousands of dollars for access to their own money, dollars they have earned.

Postal banking would distinctly benefit rural communities, which often have higher populations of Black and Native residents and poor White residents.

In states like Alaska and Montana with high percentages of Native Americans and Alaska Natives, rural residents could manage money at their local post office instead of traveling hundreds of miles to the nearest bank branch. A local post office is more geographically convenient than a bank for Black residents in the rural South and for poor White residents in states like Ohio and West Virginia.

Banks cost too much

Affordable banking options let people deposit or cash their paychecks – or government assistance checks, like the coronavirus rescue payments – cheaply, easily and conveniently. That helps them keep more of their own money and manage their finances.

But many Americans – whether they have bank accounts or not – are concerned about the costs and fees associated with keeping money in a bank. About 1 million Black households do not have a federally insured bank account, with over half citing costs as a 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 make an increasing share of their money by charging fees to maintain a minimum account balance, cash a check, or withdraw money from an ATM. In 2001, banks made 14% of their money this way, but by 2018 those charges provided 25% of private banks’ 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 hit harder on lower-income families, too, as they are typically flat rates that cost higher-earning customers a smaller percentage of their income.

When you know better …

Other countries offer a cheaper option with widespread access for the public – and the United States used to, as well.

From 1911 to 1967, the U.S. Postal Service operated a banking system out of the nation’s post offices, letting people cash checks and deposit money into 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 every year.

In September 2021, the Postal Service launched a limited pilot of postal banking at four post offices – in Washington, D.C.; Baltimore; the Bronx, New York, and Falls Church, Virginia. Customers can cash checks of up to $500 at post offices, loading the money onto gift cards usable for purchases online or in person. The service costs a flat $5.95 regardless of the amount of the check. That fee can be expected to remain low, or even decrease, because the Postal Service only needs to break even, rather than demonstrating profits for shareholders.

The pilot program is expected to expand not only to other post offices but also to additional services such as paying bills and withdrawing cash from ATMs. Consumer advocates contend that the Postal Service can offer retail financial services at lower costs than private banks and check cashers and payday lenders.

Now that Biden has signed the Postal Service Reform Act of 2022, postal banking could become both permanent and available at all of the nation’s more than 30,000 post offices.

Among various other efforts to shore up the financial status of the Postal Service, the law would authorize the service to cash checks, establish checking and savings accounts, and assist with sending money – beyond the current money order option. Post offices could also make small loans at interest rates much lower than payday lenders charge.

The law doesn’t 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 with the UChicago Inclusive Economy Lab, a senior fellow with the Economic Security Project, and 2020 fellow with the Open Society Foundations.