May 15, 2018

No More PayDay Lending?

Sen. Kirsten Gillibrand has proposed "legislation aimed at putting an end to current payday lending practices by giving some banking services a new home:  the U.S Post Office" as reported by CNBC. 15 states have effectively outlawed payday loans, limiting loan options for residents there. Allowing the USPS to offer small loan services would further dent the business models of payday lenders while giving the USPS a new revenue source. 

According to The Economist more than 1 in 4 Americans are unbanked or underbanked leaving them to check cashing and payday lending companies and high rates. They note that "the average underbanked household has an annual income of only $25,500 or so, yet spends around 9.5% of that on fees and interest charged by these banking substitutes." In addition to meeting the needs of current payday loan customers the Post Office could reach rural customers with financing needs at a time when banks are withdrawing from many rural communities. 

PayDay Loans By The Numbers

1000
Locations
1000
MM
Borrowers
$
1
B
Loan Volume

Post Office
Lending

The USPS employs over 500,000 employees. There's a good chance that some of them are payday loan customers. But in terms of value to potential customers shifting even some of the 12 million payday loan borrowers to a lower cost Post Office option would free up money for other needs. In fact the USPS would compete primarily with high cost payday lenders rather than banks. As The Economist notes 'Some 59% of its post offices are in places with either a single bank or none at all.'

 

Post Office By The Numbers

1000
Locations
1000
M
Employees
1
MM
Customer Visits

The USPS could start with basic information to help underwrite new loans. For starters they know how long someone has lived at their current location and how often they've moved. They also might be able to leverage information on the volume and type of mail a potential customer gets as a form of alternative data (e.g., do they get a utility bill).

The Post Office would need a funding mechanism. Adding deposit services could aid both small businesses and consumers. Given the low rates currently paid by banks a little competition for deposits might dent bank profitability but would benefit all consumers. The USPS has a history as a deposit taking institution. From 1911 to 1967 it accepted personal deposits. 

Another service the Post Office could provide as part of the underwriting process could be a check to see what other government and social services a customer might qualify for. This would deliver tremendous value to each customer regardless of their financial status. 

While this might represent a dramatic change for the USPS it seems like a natural evolution which would allow them to leverage their infrastructure of offices and staff more fully. And help address their financial challenges. 

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