A mere $400 is all that’s standing between millions of Americans and major financial drama.
That finding, from a Federal Reserve study in May, means that everyday problems like a blown tire, a home repair or a couple missed shifts can spiral into months of financial stress—or even insolvency—for people who live paycheck-to-paycheck.
Many of those Americans end up turning to payday lenders, which offer small amounts of money for short periods of time without asking too many questions. That easy money comes at an enormous price: a typical payday loan is $375, and costs the average borrower $520 in fees, according to a study by the Pew Charitable Trusts.
Payday lenders have been around since the early 1990s, when they began sprouting up as storefront check-cashing places in urban areas. But they have gained customers in recent years, partly because the Great Recession strained Americans financially, but also because banks kicked more of their poor customers out of the system. Today, payday lenders extend an estimated $46 billion a year in credit to roughly 12 million households through 22,000 locations.
The booming industry has drawn scrutiny from the Consumer Financial Protection Bureau. In March, the agency unveiled a proposal that would restrict payday lenders, and has taken enforcement actions against several. Last week it sued one for allegedly deceiving borrowers.
Payday lenders have also gotten attention in political circles, with some arguing the U.S. Postal Service should wipe them out by becoming a bank. Sen. Elizabeth Warren, a liberal Democrat from Massachusetts who effectively founded the CFPB, first began touting this idea in February 2014. It has support from Sen. Sherrod Brown, a Democrat from Ohio, and Sen. Bernie Sanders, a socialist Democrat from Vermont who is running for president. The post office’s inspector general has endorsed it, too.
At first glance, the post office might seem like it has absolutely nothing in common with a payday lender. But they are very similar in an important way: sheer ubiquity.
The Postal Service’s 31,000 branches touch communities all over the country, and represent a familiar and trusted brand. But rather than reaping profits on the backs of the poor the way payday lenders do, the Postal Service has a mission to serve the public without earning any money.
In fact, postal banking isn’t such a strange concept—it’s just been dead for awhile. The Postal Service maintained deposit accounts for decades until 1967, when the program ended due to declining popularity. It never made loans, but advocates for postal banking say that if post offices simply offered bank accounts, check cashing, and no-fee ATMs, it would generate enough savings to offset the need for payday lending.
This plan has critics, too—some who say the post office would compete unfairly against banks; some who think the government shouldn't be involved in private markets at all; and some who think the post office is outdated and ill-equipped to do financial services.
Getting a proposal through Congress would undoubtedly be tough.
Rep. Darrell Issa, a Republican from California, has been the most vocal opponent. At an event last year he described postal banking as “a highly subsidized government-fed way to provide…financial services to the underserved.” He argued there are better ways to do that if the country decides it wants to.
As lawmakers debate the particulars, the private market may find its own solution in the form of another ubiquitous American entity: Walmart.
After pursuing a banking license for years, the retail giant was effectively rejected in 2006. Since then, Walmart apparently gave up on becoming a bank through official channels, but it has built up a variety of banking services anyway. Some come through partnerships: a credit card with American Express, deposit accounts with Green Dot, small business loans with LendingClub. It also offers low-cost remittances, competing head-on with Western Union.
Walmart did not respond to multiple requests for comment on this story, so it’s hard to know what its banking aspirations are, if any. But in theory, it could become a very viable player in payday lending by undercutting the competition the way it does in all of its other businesses.
That would be a good thing in that loans would become less expensive for poor people stretched for cash. But, unlike the post office, Walmart does not have a social compact with the communities it serves and it is undoubtedly motivated by profit.
For instance, its GoBank account levies an assortment of fees, including an $8.95 monthly membership fee if there isn't a minimum direct deposit of more than $500 into the account. This is something banks do, too, but something the proposed postal bank would try to avoid.
Banking scholar Mehrsa Baradaran is a postal banking supporter who recently wrote a book called How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy. In a panel conversation hosted earlier this month by the advocacy group Americans for Financial Reform, she explained simply why the Postal Service is the best option to bank the poor: “The post office is a dinosaur, not a shark.”
Editor's note: This story has been changed to show Sherrod Brown's correct political affiliation. He is a Democrat.