How U.S. Post Can Save America – And Herself – Quartz
Since the financial crisis, more than 4,800 bank branches have disappeared from the American business landscape.
But in many parts of America, the decline of the bank branch has hardly been noticed.
This is because in these neighborhoods, the banks have already disappeared for decades.
The departure of banks from the poorest, predominantly minority neighborhoods in the 1970s forced millions of Americans to manage their financial lives using a motley system of payday lenders, check cashing and debit cards. prepaid. These services offer few of the protections of the traditional banking system in exchange for nosebleed fees and transaction costs. (The recent RushCard debacle, in which thousands of people were unable to access their funds for more than a week in some cases, underscores the precarious nature of marginal finance.) In other words, it’s is a bad deal.
In his new book, How do the other half-banks, Mehrsa Baradaran, professor of law at the University of Georgia, traces the historical origins of the American banking system, with particular emphasis on the regulatory changes that began in the late 1970s. These changes allowed banks to consolidate beyond state borders and leave to themselves the least profitable – even the poorest – portions of the population. And she presents her own modest proposal for how to change the status quo by leveraging an American institution that is struggling to stay relevant: the United States Postal Service.
Baradaran stopped by Quartz’s New York City offices earlier this week. Here is our discussion, slightly edited for clarity and brevity.
Quartz: Then let us know. How did we arrive at the current situation in terms of the share of unbanked in the United States? From what I understood from the book, deregulation and the ability of banks to charge more fees on accounts basically allowed banks to dissuade people from having accounts.
Mehrsa Baradaran: I think the fees are the symptom and not the cause. Banks will compete for the most profitable income. This is what the banks always want to do. And before, we forced them not to do that. Once we stopped forcing them, market forces took over. Banks are obviously going to try to put the wealthiest people in the wealthiest places, and that’s why you have these banking deserts.
One of the most infuriating points in the book was where you referred to a report that showed from 2008 to 2013 banks closed almost 2,000 branches, 93% of which were in neighborhoods below income level. median of the United States.
It’s a bit like redlining, but economic redlining. You have banks that are merging a lot more than before, and weaker banks are kind of swallowed up as a whole. And so, of course, they are going to close their less profitable branches and it will obviously be the inner city, low income, largely in the minority.
And is there a correlation between the decline of branch offices in these regions and the growth of fringe banking services, such as check cashing facilities?
Absolutely, there is direct causation, not even correlation. John Caskey in his book Marginal banking services shows exactly that: as soon as the community banks leave, the marginal bankers come to fill the void. There was no payday loan until the 1980s, and now there are more payday loan points than Starbucks or McDonald’s.
There have always been loan sharks, let’s be clear about that. But the large scale payday loan industry was not something we had in America.
Can you tell us a bit about the demographics of those who use payday loans and other fringe financial products, like prepaid cards, instead of bank accounts?
Those who don’t have a bank account and use prepaid cards, it’s lower income, about $ 30,000 in annual income. So that’s a lot of people.
But there are also a large number of underbanked people. They have a bank account. But they rely on fringe lenders for their day-to-day needs. They have jobs and regular paychecks because you need to have a paycheck and you also need to have a bank account to get a payday loan. It’s the middle class. … The people who come in are your neighbors, middle-class people who don’t have a large reserve of savings and who sometimes need an emergency loan.
You argue that people don’t go blind when they get a payday loan. They know it’s a bad deal, but they just feel like they have their backs to the wall.
Look, the poor are not stupid. Personally, I think a lot of people who use payday loans are much more financially savvy than I am. They must be. Often, they take out one loan to pay off the other and they arbitrate interest rates and prepayment penalties. They know exactly what they are doing. There just aren’t many alternatives.
So, for a person who is in need of money, it is a very rational choice to take out a personal loan. Often the alternative is to go see your friends and family. There are a lot of downsides there. Or you go to the black market. And there are still people who turn to loan sharks. But I’d take a payday lender any day on top of that.
Bank branches have largely left the working-class neighborhoods. And you point out that one of the institutions that has not left these neighborhoods is the post office. Can you tell me a bit about the idea of postal banking.
First of all, I want to say that it is absolutely not revolutionary. Postal banking was offered in the United States from 1873. After 40 years, it was adopted in 1910 and lasted until 1966. All other developed countries have this.
Here is the point. You have all these banking deserts and banks that have left these areas, and the post office remains. They already operate on cash. They have a national network. And so they are in a good position to offer very simple financial services and small loans.
One of the repercussions of this idea is that “postal workers deliver letters that they are not trained to be bankers”. But you point out that the people who work in check cashing facilities are not the same as those who work on Wall Street, they are basically retail employees.
The postal bank employees would not subscribe, they would not do an IPO. It is not rocket science and it does not require special training.
We have seen Bernie Sanders make proposals on postal banking. I think Elizabeth Warren mentioned it.
I worked with each of them behind the scenes. I first wrote this article three years ago proposing postal banking, and in 2014 the Office of the Postal Inspector General wrote a white paper on postal banking, and since then there is has had a lot of movement on this. And recently, there has been a bit more lightness, with Bernie Sanders.
The problem is simply not going to go away. In fact, it’s just going to get worse. There are more and more bank consolidations, fewer banks and more inequalities. You will see this gap widen. So I think it’s time to revisit postal banking.
Could you tell us a bit about the type of loans you plan to do through these banks? I think this is one of the places where a lot of people will say, “Will there be political pressure to lend people money that taxpayers are basically going to be required to pay for if there is?” has losses? ”
There are therefore two ways of structuring loans. One could be like a payday loan, you know, secured against your future income. It would work the same way, but with much lower interest charges. Now, a lot of payday loans, because they have high interest rates and high fees, are supposed to be renewed over and over again. But the post can do more like an installment loan. You could pay it off slowly over five or six paychecks. But again, we would cap them between $ 500 and $ 1,000. We are not talking about huge and risky loans.
The other way to do it – and the way the UK does – is basically to have a checking account that you could overdraw by a certain amount. And you have a negative balance. You earn interest on this negative balance until you push it back to zero. And that’s how you basically lend. And when your paycheck comes in, it pays off the negative balance. The interest rate would be a non-usurious rate. It would be another way to simply lend.
As to the political chances of getting this through, you wrote an interesting story of what happened in 1910. Basically the Post went out of its way to explain to the banks, “We are not trying to steal your depositors. You are not interested in this business anyway, we will just do it. Do you think the Post will have to make the same argument this time around?
Yes. You must, one, convince the banks that we are not looking for their customers. We have to get rid of the banks, because the banking lobby is very, very strong, especially the community banks. You saw with Walmart. Walmart tried to become a bank, which was closed quickly and efficiently. But I really think it’s an honest argument to say, “It’s not your customers, you don’t make these loans. You are not interested in this business.
Now the industry you are concerned about is, of course, the payday lenders and check tellers. But honestly, I think with a straight face we can say, “Tough”.
It is a difficult political argument to make in defense of payday lenders and check tellers.
In chapter four or five of the book, I talk about the public’s antipathy to usury. No one likes payday loans. Yes, maybe this industry is going bankrupt, but it is difficult. We are well.
So what do you think are the chances that we will soon have another postal banking system?
You know, it took 40 years the first time around, I hope it won’t take 40 years this time. I think we have to put the banks at ease. And I think you really have to convince people that there is postal banking, or we’ll lose the post office. The post office has reached its maximum line of credit from the treasury, allowing it to either significantly reduce costs or increase its revenue. And it’s a way for them to add income without taxpayer money. It’s really obvious, I think.