Postal banking, warts and all, is part of the payday conversation

Editor’s note: A version of this first appeared on GonzoBanker, Cornerstone Advisors’ blog on banking.

You have no doubt read that Sen. Kirsten Gillibrand, D-N.Y., has introduced legislation that would essentially turn our nation’s 36,000 post offices into quasi-banks, a move she thinks would squash payday lenders and provide more affordable financial services to consumers along the way. In her words: “Literally the only person who is going to be against this is somebody who wants to protect payday lender profits.”

The reaction to just about anything Gillibrand says tends to be pretty predictable. Those with left leanings swoon at the Democrat’s every idea and those leaning right will write her off as a Lib-Kook. But setting aside any gut-level reaction about the senator or her claim that opposing her legislation is the moral equivalent of a Facebook “like” for payday vultures, is Gillibrand’s proposal a good idea? Well, it’s exactly half of a good idea.

Zach Gibson/Bloomberg

Where Gillibrand loses me is with her idea of U.S. Postal Service locations taking deposits and mimicking bank branches as a result. That is 100% a terrible idea. Anyone in the financial services industry knows that the last thing we need is more bank branches. Seriously, even the most optimistic head of retail banking would be unable to suppress giggles at the wisdom of potentially 36,000 more bank branches across the country.

First, we’re moving toward fewer branches, not more. And that’s not because of some evil, efficiency-seeking strategy to save money by serving fewer unprofitable customers. The industry simply doesn’t need more branches. We have online banking. We have mobile banking. We have ATMs. We have interactive voice response. Come on.

According to a Federal Reserve study, the industry is doing a pretty solid job of providing banking services to the unbanked and underbanked without adding thousands of branches into the mix: 40% of the nation’s unbanked have access to a smartphone and another 28% have a feature phone. At the same time, 70% of the underbanked have a smartphone.

Any more persuasive gymnastics are just insulting to the reader’s intelligence. This part of Gillibrand’s idea plainly lacks any nod to commonsense.

But then there is the asset side of the balance sheet to her idea. Let’s face it. Payday loans may have started as a semi-benevolent idea to help those in temporary need of a few bucks until next Friday, but they have morphed into the Heartless Empire of the banking industry. And as stakeholders in the reputation of the financial services industry, we should be red-faced angry — pound-the-table pissed off — about what payday loans have become.

Just how bad are they?

Let’s start with APIs that kiss the 400% level without any effort at all. They can elevate into 1,000%+ without breaking a sweat. According to a study by The Pew Charitable Trusts, payday loan borrowers have these traits in common: They make under $40,000 a year and have no college degree, spouse or real property ownership — not exactly a group that can afford 1000% APIs. Payday loans are only even remotely reasonable and helpful over the long term if the borrower repays the loan very quickly. The Consumer Financial Protection Bureau has called payday loans a “debt trap.”

As bold of a step in the right direction as Gillibrand’s bill could be, let’s not pretend that the USPS alone could start making payday loans without credit risk going postal or the agency failing miserably to execute a collections strategy. No, it’s going to take outside partnership to pull this idea off without the next USPS headline being something like “USPS payday lending loses $1B in 3rd quarter.” A couple of partnership candidates could include the Center for Financial Services Innovation and notable credit union players like WSECU, an Olympia, Wash.-based credit union, and its Q-Cash short-term loan.

Bottom line: Let’s ditch the talk about taking deposits in the post office and get behind the lending side of Gillibrand’s idea. Payday lenders dying a slow death at the merciless hands of the USPS will only help the financial services industry’s bruised reputation and bring a much more affordable and sensible borrowing alternative to those who need a little temporary help now and then.