By Nik Milanovic, Forbes | August 26, 2020
I recently asked a dumb question that provoked strong reactions: Why isn’t there a national, government-owned consumer bank that offers everyone access to basic services like savings and checking? There is not a simple answer, and it has as much to do with American philosophies on public services as it does with logistical constraints.
With that said, the U.S. financial system is not adequately serving all Americans. There are 55 million unbanked and underbanked American adults, per the Federal Reserve, representing 22% of all households. If we cannot provide financial services to almost a quarter of our neighbors, we are failing them. This is the right moment in history to explore the creation of a ‘public utility bank’.
The idea of a government bank is not new. Starting in 1910, the U.S. Postal Service ran the Postal Savings System, a bank which at one point accounted for 10% of assets in the entire retail banking system. The bank operated very simply –
- The minimum deposit was $1.
- There was a maximum balance of up to $2,500, over which consumers would be encouraged to use private banks.
- Deposits earned 2.5% APY, with 2% paid to the account-holders, in order to cover the costs of the system.
- The Post Office then re-deposited most of the assets into local banks, growing their balance sheets under its own account.
As the USPS notes, “Although bankers first viewed the Postal Savings System as competition, they later were convinced that the Postal Savings System brought a considerable amount of money out of hiding from mattresses and cookie jars.”
The American Postal Bank is also not unique. One thing that France, Italy, Japan, China, Brazil, India, and New Zealand have in common is that they all continue to offer financial services through their post offices.
So why did it decline? Following World War II, private banks raised their APYs, added the same protections (FDIC insurance) as the government, and provided better services to consumers. It was a natural changing of the guard: private banks had an incentive to compete for the deposits of all consumers by meeting their needs. The Postal Bank shut its doors in 1967.
Today’s banking system is very different. In 2019, banks collected almost $12 billion in overdraft fees, 84% of which came from the poorest 9% of consumers. Banking is uniquely expensive and difficult for low-income consumers, who deal with low-balance fees, fees for checks and ATMs, and delays on access to their deposits. In 2011, the share of no-fee accounts dropped to 39% from 76% in 2009. Average monthly fees, meanwhile, grew 25% from 2010 to 2011.
The rationale is simple: it is expensive, more risky (in terms of solvency), and less profitable for banks to service low-income consumers. Financial regulators have passed limits on overdraft fees and debit interchange, but fee limits are like squeezing a balloon: if fees are capped for one service, banks will charge for another (as well they should, given they are for-profit enterprises). But banks cannot afford to lose affluent customers, and so the fees tend to fall on those who have no other options: low-income consumers.
This is the situation Americans face today, and this is why 22% of households find themselves compelled to save money under the mattress, use check cashiers, and borrow from payday lenders.
A public utility bank would not compete with private banks for these 55 million consumers, it would compete with the mattress and the check cashier. If anything, an on-ramp to basic financial services would let consumers build credit and wealth in a way that lets them graduate into the kind of customers that banks want.
Last year, I took some time to lay out fundamental principles of what money should be. The most important is that it should not cost people money to use or access their money. If someone gets paid $100 (after tax), they should be able to use that $100 without paying fees to do so.
In addition, simple subsistence-level financial services should be available as a public utility. Buying household goods, saving for your child’s college education, using a loan to buy a car to get to work… These are some of the basic financial interactions that make up day-to-day life, and many of them are either difficult or inaccessible to the poorest Americans. Health and education are defined as public rights for American citizens; basic inclusion in the financial system should be too.
And while the Postal Savings System provided a necessary service, it is not the right model for a public bank today. It is time to take a 21st Century Approach to 21st Century problems, in order to modernize our financial system and make it work for all consumers.
In Part Two of this essay, we will explore the details and tradeoffs of launching an online, low-cost, public utility bank in the U.S.
This is part one of a three-part essay exploring public banking services. Check back for parts two and three. Thank you to Saira Rahman for helping me review this.