Feds Move to Replace Lenders With the Post Office
The Office of Inspector General released a white paper in January, advocating for the United States Post Office to offer alternative financial services (AFS) such as bill payment, check cashing, and small-dollar loans. The timing of the paper’s release suggests it may be part of a larger federal plot to kill AFS altogether--clearing the way for a USPS takeover.
A close examination of the plan reveals it could never work, given existing AFS competition.
On the surface, the paper has conceptual merit. With 34 million households lacking a bank account, and the Center for Financial Services Innovation claiming this population spends an average of 9.5% of annual income on AFS, why not let the USPS compete in the AFS sector? Consumers generally benefit when competition enters the market. If consumers save money, they can build up emergency funds and deploy residual savings into the economy.
Even better, the USPS already has physical infrastructure in place for the project, as 59% of post offices lie within zip codes that have zero or one bank branch. The USPS would have to obtain regulatory clearance to offer these additional products, but the OIG notes that since USPS already offers money orders and transfers, such clearance would be unreasonable to withhold.
The plan would shore up USPS finances. The post office has been under enormous competitive pressures in the past decade. Its 2013 Annual Report announced another $5 billion loss, and a USPS-commissioned study from Boston Consulting Group suggests things will get worse. An April 2013 GAO report concluded, “Urgent action [is] needed to achieve financial sustainability … driven by a 30% decline in first class mail volume since 2001.”
The OIG paper suggests the USPS may be able to capture as much as 10% of the AFS revenue market, estimated at $89 billion annually. Additional annual revenue amounting to $8.9 billion would substantially benefit the USPS, provided it maintains its current level of operating expenses, and it could generate modest net margins.
It all sounds like a delicious concoction, unless you know something about the AFS arena, in which this author happens to have ten years' experience.
The post office has the physical locations already in place, eliminating any capital necessity to establish a geographic footprint. However, that’s where any advantage it might have ends.
The products suggested by the OIG are exactly the same as those offered in 11,000 pawn shops, 22,000 payday loan stores, and 13,000 check-cashing shops in the U.S. These AFS providers already have first-mover advantage and loyal clientele in these underserved communities. USPS is not entering an untapped market and, therefore, would have to compete on convenience and/or pricing.
Convenience? At the post pffice? The post office that still, 18 years after the Unabomber, won’t permit us to drop a 14-ounce mailer into a postal box? Federal Express, United Parcel Service, and other couriers have built multibillion dollar businesses around USPS’ historic inefficiencies: understaffed offices, long lines, mail hold, package retrieval, and passport services, all of which dramatically degrade counter efficiency. Yet the post office wants to add AFS? Check-cashing requires anti-fraud and anti-money laundering verification. Small-dollar loans require bank account and employment verification. Servicing for these products will only make those lines longer, and it will require additional costs (and years) to train postal workers to be AFS providers.
This leaves USPS to compete on pricing. The OIG asserts that payday loan (PDL) customers would welcome a five-month term and 28% APR, compared to a two-week term and 15% fee. However, in addition to a price/convenience decision, that same consumer will consider the price of the societal stigma associated with a loan request. PDL customers are embarrassed to enter a PDL store as it is. It’s one thing to ask for a loan where everyone is doing the same thing--in an AFS store. It’s anathema to ask for a loan from a government employee in a room full of postal customers.
Evidence supports this behavioral analysis. Stephens Inc., the primary investment bank analyst in the space, reports that internet lenders have captured 35% market share from storefronts, despite their products being 60% - 100% more expensive. The data could not be more conclusive: Borrowing from home serves the convenience factor--and avoids public embarrassment.
What about that five-month term and 28% APR? An FDIC small-dollar loan program with similar terms was attempted between 2008 and 2010. It failed. Despite the cost savings offered, the 450 bank branches that offered the product made an average of three loans per month, less than a PDL store’s 200 monthly loans. Consumers like their local AFS providers. They do not like banks. They do not like the post office.
It seems unlikely that the OIG plan would work--unless, of course, there was no competition.
Is it possible that the OIG isn’t concerned with competition or execution risk because it knows the federal government is trying to clear out competitors? It would explain how such a sweeping proposal demonstrated gross ignorance regarding the elements for success.
Is it a coincidence that OIG’s white paper was released in close proximity to Operation Choke Point, the DOJ-led operation story that Breitbart News’ Michael Patrick Leahy broke? Operation Choke Point is specifically designed to kill the online lending industry.
Is it a coincidence that Operation Choke Point immediately followed the FDIC’s de-facto ban on bank deposit advance products, which were small-dollar loans that were 50% cheaper than PDLs?
The proximity of these three events is enough to raise suspicions, but it would also explain some oddities in the OIG white paper.
The report’s recruited experts (footnote 3) do not include any members of the AFS industry. There are no lenders, check-cashers, prepaid debit card providers, bill payment servicers, analysts, researchers, academics, journalists, or consultants listed. AFS data collectors, who between them have data on hundreds of millions of transactions, are nowhere to be found. One would think that if the OIG was planning to burst into the AFS arena it might consult resources that had actual experience in the AFS space.
The report also relies on demonstrably false information to make its case, when truthful resources--provided by neutral academics and researchers--are readily available. For example, the OIG cites the much-criticized Pew study, which falsely claims a 4.5-month repayment period on the average PDL, implying the average loan is renewed eight times. Yet as this author has repeatedly written, SEC filings of public PDL companies report that 94% of PDLs are paid on time, the industry’s trade association limits renewals to four, and most states prohibit multiple renewals.
What better way to make a case for a government invasion of a $90 billion industry than cite only those resources that have illegitimately demonized that same industry?
The OIG report also relies on last year’s CFPB white paper on payday and bank advance products. Industry insiders, independent researchers, and a former CFPB employee agreed with this author’s assessment that the white paper is fatally flawed in its over-sampling of high volume users and under-sampling of low volume users.
Finally, any plan endorsed by Sen. Elizabeth “Fauxcahontas” Warren should be given additional scrutiny. Warren has been a perpetual opponent of PDLs. Her use of the phrase “loans you can trust” is revelatory of her biased position.
Ideological factions within the Obama administration have been exposed for hating payday lending. What better way to kill a product that has never once been proven to cause consumer harm than to just regulate it out of existence--and have a government operation take its place?
Rep. Darrell Issa (R-CA) and Rep. Jim Jordan (R-OH) need to request documents from the Inspector General to go along with those requested from the perpetrators of Operation Choke Point. There’s enough smoke surrounding this entire affair to warrant further investigation.