Post Office Banking: Return to Sender
Most US adults have a bank account. What millions lack is access to credit. Is re-introducing post office banking a good idea to address this challenge?
Concern for and discussions about inflation and other economic conditions that affect consumers often drives new conversations about (re)introducing banking into post offices in the US. Yes, the US did have post office banking from 1911-1967. But does that mean going back to post office banking is a good idea? Will post office banking increase access to financial services? Do people need more access to basic banking and payments services?
And, what about the customer experience?
I’d like give you an example, an anecdote, of how the US Postal Service handles non-post office (that is nothing to do with mailing letters and packages, stamps or post office boxes) services. In 2021 I wanted to get a passport for my minor child. You can submit an application at a post office – but only to those post office branches that are designated US Passport sites. This is supposed to be the easiest option – as the other option is to go to a State Department office. Because of the pandemic, the USPS website informed me that I had to schedule an appointment online to submit the application.
Most of us are used to scheduling medical appointments and travel arrangements ourselves or shopping online. Making an appointment at a US Post Office branch to submit a new passport application was not like any of those experiences you’ve had. First, there were two different places to find a branch and make an appointment. One at the State Department website and one at the US Post Office website. And, no, they were not the same. The State Department website allowed you to locate post office branches, show whether they also provide photo service, but you couldn’t make an appointment. To do that, you had to go to the Postal Service website. No, there was no link to that website. And, no, the Postal Service website didn’t have a link to that feature on the main page. You had to search for it.
I could search for post office branches based on zip code with the mix of passport services I wanted and who I wanted the services for (minor child) – but had to go back to the State Department website if I didn’t know what these are. Did I know what zip code post office branches with passport services are near me? No, I did not.
Then, the system required that I choose a specific post office and specify the exact date I wanted to go. The system shows a calendar of days with appointments available. I picked a day and then…. the system responded that there were no appointments available for that day. The system let me select dates for the current and following month. So, I had to pick another date for that specific branch or backtrack and pick a different branch and go through the process all over again. All that is missing is a green screen and an error message "transaction aborted."
Eventually I hit on a branch with actual appointments available on days I could bring my daughter and I scheduled the appointment. I got a confirmation email the next day.
Before I went to our scheduled passport appointment, I double checked the costs of all the services we needed and made sure I had the correct payment methods for all the various costs. That’s right. I had to use multiple payment methods to submit a completed passport application.
If you’re used to paying by mobile, debit card or credit card, you may be in for a shock. Payments for passport applications and photos are made to the US State Department and the US Postal Service separately. Payments to the US Department of State cannot be made by debit card, credit card or bitcoin. The State Department requires paper check or money order. The US Postal Service will take a paper check as well as cash, debit card or credit card. And, no, you can't write 1 check or make 1 debit/credit card payment for all costs.
Assuming that a post office branch is the best way to deliver financial services to more people and small businesses, is this a “customer journey” that should be replicated?
Who Needs Basic Banking & Payments?
Before I can address that question, I think it’s important to look behind the assumption that people need more financial services and whether these services should be provided at US post office branches. Support for banking at US post office branches assumes two things:
1. There are a significant number of under- and unbanked people and business owners who need basic banking and payments capabilities
2. The US postal service is the best means of solving this problem.
In this issue, I address the financial services-related issues for under and unbanked consumers. In the next newsletter issue, I’ll analyze how financial institutions could respond to this challenge and, yes, opportunity.
Almost all US consumers have access to a checking or savings account.
There’s tons of data, analysis and discussion about the unbanked and under-banked people world-wide. The problems, challenges and solutions are generally not the same in each region or country.
The calls for post office banking in the US assumes that there are huge segments of people who don’t have access to basic banking and payments services. However, the data shows that most people in the US have access to banking and payments services. Most have bank account and get their needs met through that bank or credit union. According to the US Federal Reserve report Report on the Economic Well-Being of U.S. Households in 2020 - May 2021, 81% of US adults have a bank account and haven’t used an alternative financial service:
Most adults in the United States (81 percent) were "fully banked," meaning that they had a bank account and, in the past 12 months, did not use any of the alternative financial services asked about in the survey. Such services include money orders, check cashing services, payday loans or payday advances, pawn shop loans, auto title loans, or tax refund advances.
In 2022, the Federal Reserve Bank of Atlanta published the results of its 2021 survey of US consumer and payment methods. The results revealed that the number of unbanked consumers decreased further:
95 percent of US consumers had a bank account, the highest share reported since 2008. Ninety-three percent of consumers had a checking account and 74 percent had a savings account (Table 1). (Source: Atlanta Federal Reserve The 2021 Survey and Diary of Consumer Payment Choice: Summary Results)
The main takeaway from this data is that we can’t assume that the under and unbanked aren’t a single monolithic demographic. Those who are underbanked or unbanked aren’t necessarily using fintechs or other alternative financial services. In this, they have something in common with those who are banked.
Not all unbanked consumers use fintechs or alternative financial services
The assumption that underbanked and unbanked consumers use fintechs or alternative financial services providers is not entirely accurate. In the US at least, even adults without bank accounts don’t always use alternative services.
According to the Federal Reserve 2020 Economic Well-Being report, the rest of the adult population (5 percent) did not have a bank account. Less than half of these "unbanked" adults used alternative financial services.
The Fed data shows that use of alternative financial services has actually declined.
the share of adults using alternative financial services was 3 percentage points lower than it had been in 2019, a decline of 15 percent. Declines were similar for people with and without bank accounts, which suggests that the decline in the use of alternative financial services may not be attributed to wider availability of banking services.
·In some respects, underbanked consumers are no different than their banked counterparts. Like other consumers, underbanked consumers look elsewhere for services they can’t easily get at banks. They use “alternative” (aka fintech) financial services for those they can’t get through their bank, the product is too expensive or the consumer isn’t even aware that the bank offers the service. Again, according to the Federal Reserve report:
An additional 13 percent had bank accounts but made use of alternative financial services. These adults are considered "underbanked" because the banking services they accessed appear to have been insufficient to meet their financial service needs.
That’s right, – that is, missed opportunities for bankers, opportunity for fintech disruptors) Some adults who have bank accounts still use alternative financial services.
The Real Problem is Access to Credit
This data about the extent to which US consumers have access to basic banking and payments - savings and checking accounts does not mean that many consumers lack access to financial services.
According to the 2020 Federal Reserve Report income, education, race and ethnicity are better predictors of adult access to financial services:
Unbanked and underbanked rates were higher among adults with lower income, adults with less education, and Black and Hispanic adults. The largest differences were by education and income level. Twenty-six percent of adults with less than a high school degree, and 16 percent of adults with income below $25,000, were unbanked. The share of people with income under $25,000 without a bank account far exceeded that of the two highest income levels. As a result, 84 percent of all unbanked adults had income below $25,000, and 94 percent had income below $50,000.
The real problem for the under-banked and unbanked is access to other, non-basic financial services. The real problem is one of access to credit.
Impact of Income, Race & Ethnicity on Access to Credit
The real problem for the under-banked and unbanked is access to other, non-basic financial services.
84% of unbanked adults had an income below $25,000. 94% had an income below $50,000.
The impact of income level, race and ethnicity and access to financial services shows up in the rate of credit denial:
The share of adults who were denied credit, or approved for less than requested, differed by income level and by race and ethnicity. Almost half of credit applicants with income below $50,000 experienced such actions, compared with only 13 percent of those with income above $100,000. Denial rates also differed by race and ethnicity, and these differences occurred at each income level. For a given income level, Black and Hispanic applicants were denied credit at higher rates than the overall population, while White and Asian applicants were denied at lower rates. Source: Board of Governors of the Federal Reserve System, Economic Well-Being of U.S. Households in 2020 - May 2021
Branch Closures Lead to Branch Deserts & Less Access to Credit
There’s a relationship between the access to credit and all the branch closures: Access to credit is exacerbated by bank branch deserts and branch closures.
While there are plenty of good reasons to close branches, these closures have an impact on some people’s ability to get approved for credit, especially business loans and mortgages.
Access to bank credit, particularly for small businesses, declines as the distance between the bank and borrower grows. In addition, this 2005 Journal of Finance study found that small business loan rates increased with the distance between firm and bank.
People in low-income tracts are more than twice as likely to live in a banking desert than their counterparts in higher income tracts.
a U.C. Berkeley economist found that when merging banks closed a branch, the number of small business loans made in the tract fell by 13 percent for more than eight years afterward. Source: New York Federal Reserve https://libertystreeteconomics.newyorkfed.org/2016/03/banking-deserts-branch-closings-and-soft-information/
Just as it is a mistake to characterize underbanked consumers as one race or ethnicity, bankers cannot assume that bank deserts are a function of urban life. From the New York Fed report:
…residents of majority-minority tracts were actually less likely to live in a banking desert than their counterparts in non-minority tracts. This finding presumably reflects the fact that majority-minority tracts are more likely located in densely populated urban settings, where thick branch networks are sustainable, as opposed to sparsely populated rural areas that cannot sustain even a single branch.
Fewer Branches = Less Soft Information = Decreased Credit Access
Improving access to credit is not simply putting in more branches – at post offices or otherwise. The critical component of a physical bank branch that affects access to credit for those who need it is “soft information” – that is, the personal knowledge that branch managers have of small businesses, the business owners, the neighborhood and local economic conditions.
This soft information is the very knowledge and expertise that credit unions and community banks and smaller retail banks, who have established presences in local neighborhoods and communities, specialize in. But it can’t be easily or quickly replicated:
Surprisingly, the author found that the contraction in small business lending persisted even after a new branch opened. This suggests that the contraction may have stemmed not from reduced competition but from the information that is lost when a local branch-business relationship is severed. Small business lending is considered particularly reliant on soft information. Branch managers’ personal knowledge of borrowers’ intangible traits (character, competence, work ethic, and so forth) and local business conditions can inform their lending decisions, along with the usual hard information (credit score, balance sheet status, and collateral). Soft information, by definition, is subjective and hard to transmit, so if a branch manager is fired when a branch is closed, the information may not be recoverable and the manager’s former small business borrowers may pay more for credit or go without.
In the next newsletter issue, I’ll address why I think the US Postal Service is not the solution that some people hope and believe that it is to address these challenges. For one thing, post office workers are not known for their knowledge of their customers lives. For another, the credit access problems show that just offering more banking and payments services is not sufficient. Banks and other types of financial institutions can be at the forefront of the opportunities to provide the services people in and out of branch deserts need.
For banks & financial institutions:
People, for the most part, have access to banking and payments services. Your FI likely has both banked and underbanked customers and members who go elsewhere for some services and capabilities that your FI does not offer – or that they do not know you already offer.
A specific tribe of people, who are probably people of color and earn less than $50,000 per year, need better access to credit. They don’t need payday loans or unsecured loans or debt (e.g., credit card, Buy-Now-Pay-Later) but small business loans and mortgages. They may also need a checking or savings account.
Because the current economic environment makes both types of credit more difficult to get , banks and other financial institutions will have to create new products and services that analyze risks and provide credit appropriate to this tribe. FIs will likely have to rely on new tools to analyze risks for this niche group of consumers.
Another way to address the challenges of consumers who lack access to credit is to increase the visibility of Community Investment programs. Your institution probably already participates in one or more. But do people in the neighborhoods they serve know about them? Have access to them? How can you bring information about and access to these programs to the people who actually need them?
For digital banking vendors:
The challenges I outlined above give you another opportunity to demonstrate how your digital banking solution can address them:
Demonstrate how your solution can actually enable your existing and potential bank customers to serve this specific group – without creating a siloed solution.
Use this opportunity to prove that your FI customers can use technology to go-to-market quickly with new products and services.
Show how FIs can extend these capabilities to other hidden tribes of people and small businesses who experience problems getting credit for loans or mortgages especially during difficult economic times.
Financial institutions and the vendor providers who serve them must be prepared to cope with ongoing challenges of disruption, economic changes and the demand for digital transformation and access to credit. Financial institutions that will survive must be able to leverage digital banking technologies they already have or are in the process of acquiring to identify ways to improve access to credit. Otherwise, they will cede those services to competitors whether they are other banks, fintechs or other alternative providers.
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.
How can banks be truly low friction? They must address friction everywhere. Otherwise innovation & digital transformation will elude them. In this report I identified the characteristic of a low friction bank and why legacy core banking and architectures don’t support it.
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
Yes, I worked with clients on these ebooks and webinars. They may ask you for information before you can download or watch them.
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I’m an independent analyst & 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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