By Ralph Nader
Fact: Tens of millions of Americans do not have a bank account. As a result, many of these Americans spend a reported $89 billion annually in interest and fees by using predatory services such as payday loan and check cashing services. It’s a perpetuating cycle of poverty in which the poor get poorer just by accessing their own money. Fortunately, there is an ideal solution staring us in the face. An important voice driving the conversation is Professor Mehrsa Baradaran of the University of Georgia Law School. Her excellent new book, How the Other Half Banks: Exclusion, Exploitation and the Threat to Democracy describes how, for decades, big banks have shed their social contract with the American public and transformed themselves into modern monstrosities which serve corporations and the wealthy and exploit or avoid the less affluent members of our society. Setting the stage with this historical context, Professor Baradaran makes a compelling case for a postal banking system which would greatly benefit millions of struggling “unbanked” Americans.
Predatory payday loan companies and check cashing services soared like hawks in the 1980’s to take advantage of communities where community banks and credit unions were displaced by the creep of large banking institutions. The payday lending industry now has more storefronts than McDonald’s and Starbucks combined. These alternative “fringe banks” charge outrageous interest rates and fees― millions of Americans turn to fringe banks each year, which allows them to bring in $40 billion a year in high-interest loans.
Where are the so-called large conventional banks? They are increasingly closing up shop in low-income areas. According to Bloomberg, from 2008 to 2013: “Banks have shut 1,826 branches…. and 93 percent of closings were in postal codes where the household income is below the national median.” If you are living in a low-income neighborhood, just finding a bank is difficult. In 1993, we released a detailed report offering strong evidence that 49 major mortgage lenders had engaged in racial redlining in violation of federal Fair Lending laws in 16 major U.S. cities. Redlining occurs when banks and other mortgage lenders either exclude minority neighborhoods from their “effective lending territories,” or substantially under-serve such neighborhoods.
The unbanked now pay up to 10 percent of their income just to use the money they have already earned. To put it into real world terms, an American family without a bank account, earning $25,000 a year spends about $2,400 of that income on interest and fees. To put it even more bluntly―that’s more than they spend on food! (This statistic includes the chance of unpredictable financial emergencies in which those in need turn to payday lenders to bail them out at huge interest rates―50% of Americans need to borrow money for emergencies costing over $400.)
In her book, Professor Baradaran gives some real life examples: Tanya Burke, a single mother of two, racked up more than $2,000 of debt in fees and interest by taking out $600 from a payday lender to cover rent and unexpected medical costs for her son. Thelma Fleming, a mother and grandmother, took out a $300 loan to cover costs after losing one of her jobs. Forced to take out other loans to buy herself time, she ended up paying $2,500 over the course of ten months to pay back that initial $300 loan. These stories are far too common in America.
Until the 1970’s and 80’s, usury laws used to be in place to protect consumers by capping the maximum amount of interest that could be levied. Due to financial industry lobbying efforts, many states now have no usury caps (or there are ways around them.) This deregulation gave way to the enormous growth of the payday loan industry.
Another telling example from Professor Baradaran deals with a high wage earner who experiences a different borrowing outcome. “Steven” made some bad investments and could no longer afford his daily expenses. Luckily, he found a “miracle lender” who gave him very generous loans with low interest rates, saving him from financial ruin. “Steven” is, of course, America’s big banks. When the reckless banking industry was in financial duress, it received a sweetheart deal when the American taxpayers bailed it out. Millions of struggling Americans, like Tanya Burke and Thelma Fleming, are not afforded that same luxury―and the banks have not repaid the goodwill forward by respecting their needs.
This brings us to postal banking, which could help break the cycle of madness that keeps millions of Americans in financial quicksand.
From 1911 until 1967, the Postal Savings System offered simple savings accounts to Americans who preferred an alternative to a private bank. It was a successful system until the bank lobby forced its cessation. (In many foreign countries post offices still offer simple savings accounts with no fees and reasonable minimum balance requirements.)
The United States Postal Service (USPS), which unlike the banks has an obligation to serve all communities, has more than enough retail locations to serve all of these under-served consumers. Last year, the office of the USPS inspector general released a report detailing the ways in which postal banking would be beneficial to both the public and the USPS itself, which has been made to endure an unprecedented advanced payment of $103.7 billion by 2016 to cover future health benefits of postal retirees for the next 75 years. No other government or private corporation is required to meet this unreasonable prepayment burden.
While the USPS already offers some financial services such as money orders and international fund transfers, it could expand to include paycheck cashing, pre-paid debit cards, bill payments, ATMs, savings accounts and small dollar loans. The introduction of these services would offer millions of Americans a local, reliable and affordable alternative to managing their finances. With over 30,000 locations, Post Office branches are everywhere in America.
A notable supporter of postal banking is Senator Elizabeth Warren (D-MA), who has been a leading advocate on this issue. Presidential Candidate Bernie Sanders also supports it, recently stating in an interview that “…the postal service, in fact, can play an important role in providing modest types of banking service to folks who need it.”
The time is ripe to implement postal banking. What is needed is a rising rumble from the people focused on Postmaster General Megan Brennan―who has the authority to act now on implementing surcharge free ATMS, payroll check cashing, bill-paying services and electronic money transfers ―and on Congress to allow loans and other new services. For more on the issue and to find out how easy it is to get active and involved, visit The Campaign for Postal Banking.
To listen to Ralph’s in-depth conversation with Professor Mehrsa Baradaran go to ralphnaderradiohour.com.