Many Challenges for Post Office-based Banking and Payments
The US Post Office has branches everywhere, but also faces significant challenges. These challenges will hinder delivery of banking & payments services - especially credit access.
In a previous issue, I analyzed the financial services challenges that under and unbanked people and small businesses face. I uncovered a hidden tribe within those groups: people and SMBs that lack access to credit, specifically mortgages and SMB credit.
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In this issue, I address the challenges facing a post office-based solution for extending financial services to under- and unbanked people and SMBs.
Credit access is a national problem
The US Postal Service is a contracting, legacy business facing its own challenges
Credit Access is a National Problem
The lack of access to credit is nationwide in the US; it’s not limited to those people who live in urban or even suburban neighborhoods. A 2022 Consumer Financial Protection Bureau (CFPB) report reveals that like urban residents, people and businesses in rural communities rely on bank branches for access to credit:
Rural Americans depend on physical bank branches and smaller banks. In 2019, nearly 9-in-10 rural households visited a bank branch. Rural banking customers tell the CFPB that given the unique qualities of rural economies, if they are reduced to a number and fed into a large bank’s algorithm, their credit needs will not be met. However, these same customers are the ones most likely to not live within 10-miles of a bank with in-person services.
Rural Americans are less likely to have a credit history and more likely to use non-bank credit, resulting in rural consumers paying more for credit. Compared to the rest of the country, rural areas have the highest rates of people without a usable credit history maintained by one of the three nationwide consumer reporting agencies (i.e., Equifax, Experian, and TransUnion). Rural consumers without credit records have more difficulty accessing credit when they need it, such as to fill short term income gaps, recover from weather emergencies, or seek new opportunities. Many rural consumers who have difficulty accessing traditional sources of credit may turn to pawnshops and payday lenders, whose extensions of credit are often costlier and can quickly put consumers on treadmills of increasing debt. Source: CFPB Financial Challenges Facing Rural Communities
Like other hidden tribes then, those who lack access to credit probably cut across several demographic groups such as location, race, ethnicity, age and household income.
The loss of bank branches has a ripple effect: Consumers and small businesses lose access to credit. Without credit, they can’t buy homes or maintain (or expand) their businesses. The loss of a bank branch sends a signal to the larger community that a neighborhood or town or region is not economically viable. As this happens, property loses value and is abandoned. Maybe crime increases and predatory lenders move in to provide the credit residents need.
The US does not have a federal law that requires FIs to provide access financial services to everyone, everywhere. Consequently, once a bank leaves a geographic area, the bank does not have to serve the financial services needs of that community.
…if a bank closes all of its branches in an area, it no longer has an obligation to serve the needs of that community when they are examined under the Community Reinvestment Act (CRA). A CRA commitment may compel a bank to think creatively to meet banking needs, such as deploying deeper underwriting to support a community development loan or looking for relationships with area community development financial institutions. Ultimately, a decline in-community reinvestment activities follows from the loss of bank branches. Source: NCRC
US Postal Service is a Contracting, Legacy Business Facing its Own Challenges
I understand the appeal of offering banking and payments services at USPS branches: Unlike banks, the US Postal Service is required by law to have branches everywhere and usually cannot close a branch. And, many other countries successfully offer financial services through postal branch offices.
Despite this, there are several factors that make the USPS branches a poor choice for financial services delivery – especially to those who lack credit access.
Old, understaffed. Many post offices that are not processing centers are old, small, and understaffed - and this was before the slowdowns that started in 2020. I’m not against old and small buildings. Many post office buildings are historic. Small building simply means that a branch may not have sufficient secure space to offer financial services – even if it is just an ATM or kiosk.
Reduced of service hours. Like other businesses faced with business and profitability challenges, the USPS made announcements over the last decade that the USPS is reducing service hours at post offices, consolidating processing centers, and raising rates. However, this direction towards fewer hours of services does not support the needs of people who need services like loan applications, international remittance payments and check cashing outside of a narrowing window of traditional Monday-Friday business hours.
Reduced efficiency of existing services. In 2020 as part of a new plan, “Postmaster General Louis DeJoy instituted a 10-year plan for the USPS that eliminated overtime, banned late or additional trips to deliver mail, decommissioned hundreds of high-speed mail-sorting machines, and removed some mail collection boxes from streets. The changes caused significant delays for mail delivery and resulted in investigations by congressional committees and the USPS inspector general. Source: York Dispatch. Inefficiencies have continued and even worsened even after the worst part of the 2020-22 pandemic crisis.
USPS relies on postal products for revenue but those rates are set by Congress. The USPS doesn’t operate exactly like other businesses. The US Post Office is both a federal government agency and a private business. The USPS cannot take tax payer funds but the rates for its postal products (e.g., stamps and deliveries) are set by the US Congress. Will fees for financial services also be set by Congress? Will those fees fluctuate to make sure the Post Office covers its costs?
According to the laws under which it now operates, the U.S. Postal Service is a semi-independent federal agency, mandated to be revenue-neutral. That is, it is supposed to break even, not make a profit.
In 1982, U.S. postage stamps became "postal products," rather than a form of taxation. Since then, the bulk of the cost of operating the postal system has been paid for by customers through the sale of "postal products" and services rather than taxes.
Each class of mail is also expected to cover its share of the costs, a requirement that causes the percentage rate adjustments to vary in different classes of mail, according to the costs associated with the processing and delivery characteristics of each class. Source: https://www.thoughtco.com/about-the-us-postal-service-3321146
Digital already done badly. See my example in the previous newsletter on this topic. Then go try to use the USPS site to hold your mail online.
USPS already offers a payment product – and the results are not good. The USPS sells paper money orders. A 2022 audit report revealed that the USPS doesn’t monitor or manage performance or efficiencies of money orders:
Management did not comprehensively monitor money order product performance or implement initiatives to reduce window service costs, primarily because management did not have procedures for monitoring money order product performance. When structured product monitoring is not conducted and costs are not contained, management may miss opportunities to develop and prioritize product initiatives that fully optimize money order performance Source: U.S. Postal Service Money Order Trends and Cost Coverage
Money orders are unprofitable. “Postal Service money order costs exceeded revenue in three of the past five fiscal years.” Source: U.S. Postal Service Money Order Trends and Cost Coverage.
Competitive intelligence around P2P payments. The USPS also seems unaware of payment trends (debit or credit card vs cash) associated with money order purchases. That data is readily available at the US Federal Reserve Bank of Atlanta. It’s unclear from the Audit report whether the USPS considers digital P2P payment services as competition as well. I wonder if anyone who manages the money order product has looked at the Western Union or MoneyGram websites lately. Neither one mention paper-based money transfers at all:
Source: Western Union
While the USPS is focused on paper with no digital services in sight.
Source: US Postal Service
The result of the USPS’ lack of monitoring the money order service and tracking trends and competitors? The Audit report is quite clear:
Management continued to increase prices even though Postal Service money order prices exceeded those of its main competitors. Further, Postal Service money order costs exceeded revenue in three of the last five years with window service1 and debit card2 costs as the largest costs associated with money orders. Money order volume steadily decreased over the preceding five years and revenue remained volatile, increasing between fiscal years (FY) 2017 and 2018 and decreasing between FY 2019 and FY 2021 by about $16 million, or about 10 percent. Source: U.S. Postal Service Money Order Trends and Cost Coverage
Complex Organizational Issues
The USPS’s issues are complex. I don’t intend to present them as simple and/or easy to solve. Using a post office branch to deliver banking and payments doesn’t necessarily mean it will be integrated into the USPS systems.
However, I think the very complexity of these issues points to the challenges of introducing more financial services into existing USPS physical and digital systems. Like all large organizations, the USPS faces employee morale problems after both COVID and the changes that have been introduced during the last 4 years or so. If the organization introduces post office banking, it will also face the challenges of managing significant cultural and organizational changes that will come with introducing new products and services.
These changes suggest even more questions: Who will be responsible for training staff on servicing customers, all the attending regulations for every transaction and process, ensuring compliance. Just figuring out how financial services will operate within all of the different types of postal branches is a non-trivial matter.
Maybe financial services can operate as a standalone, unattended kiosk like a FedEx drop-off box in front of the post office branches now. But that service doesn’t address the access to credit needs and the value to people, SMBs and the local community as a whole that a branch provides.
Next up: Opportunities for FIs to increase access to banking, payments and credit.
I moderated a great panel of folks for a conversation on innovation. We cut through the hype and share practical advice for making your digital transformation efforts pay off. We definitely talked about the importance of small innovations.
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What can the Kardashians teach your financial institution about partnerships and innovation? How can working with empathic fintechs help you identify niche groups (aka hidden tribes) and innovate. All this and more in this this ebook that you can download at Praxent or Nymbus.
Adopt an Agile Digital Banking Platform: How bankers must have an agile digital banking platform to support both global and local trends and requirements to help them identify new niche markets that will drive innovation, create new value and increase profitability. In this report I identified a set of capabilities that a digital banking platform must have that will help take banks into a competitive future and urges banks to select a digital banking partner who shares their innovation, vision and support for new value creation.
How Your Financial Institution Can Leverage Niche Markets for Next-Level Growth: The old rules that influenced how mid-sized financial institutions acquired technology and the tradeoffs they had to make no longer apply. Why? Because new thinking on old models brings new ways for banks and credit unions to deliver new products and services to new niche customer markets. I moderated a vibrant discussion about this & more with Jeffery Kendall, Chairman and CEO, Nymbus and Tim Hamilton, CEO of Praxent.
Digital banking transformation’s surprising secret for success in Entersekt’s ebook New Directions in Authentication
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I’m an independent analyst, strategic advisor & consultant (& a former Gartner analyst). I’ve worked in and covered the banking industry for over 2 decades. I write about
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