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By Terri Friedline, Xanthippe Wedel, Natalie Peterson, and Ameya Pawar

Introduction

In March 2020, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to respond to the growing economic turmoil of the COVID-19 pandemic. Along with several interventions including supports to small businesses and expanded unemployment benefits, the CARES Act sent $1,200 stimulus payments to eligible adults. Unfortunately, many people’s payments were delayed and relief was undermined by uneven access within the United States’ profit-driven banking industry. Approximately 20 million people received paper checks by mail instead of direct deposit, perhaps indicating their limited access to a bank account for receiving money or at least not having their deposit information on file with the Internal Revenue Service (IRS). Those who received checks by mail waited weeks or months for relief and then relied on local banks or higher-cost check cashers to cash their checks. Others received much less money than anticipated when banks and debt collectors directly garnished their checks to pay outstanding obligations. While some loopholes were closed and stopgaps were attempted, these issues have recurred with subsequent stimulus payment disbursements.

In absence of easy ways to send cash, free bank accounts, and public banking options, many people have struggled to survive financially during a global public health crisis and one of the worst economic recessions of the century. Those least able to afford it—disproportionately Black, Indigenous, and people of color (BIPOC) and poor White people—were the most impacted, having to wait the longest for relief. Compared to White adults, Black and Latino adults were significantly less likely to have received their relief nearly two months after the government began sending payments. Only 60% of adults with incomes at or below the federal poverty level had received their payments during this same time frame, compared to 73% to 85% of eligible adults with higher incomes.

Postal banking is a public option for expanding access to free, no-fee bank accounts that can be used to receive money, make payments, and withdraw cash. Postal banking is popular in countries around the world and, in the U.S., the United States Postal Service’s (USPS) 30,000+ retail locations are located in communities that are now “banking deserts” after one in seven bank branches has closed since 2008. Given this, advocates contend that the USPS is well-positioned to offer basic retail financial services to the 20 million people who received stimulus checks by mail and the 33 million people that banks routinely exclude each year by charging high costs and fees.

With the rationale for postal banking already well-established, policy attention is focusing on how to implement public banking. Questions about implementation seek to understand ways of designing postal banking that deliver the maximum benefits to communities already underserved by traditional private banks. For example, while the private industry’s large banks are unable or unwilling to serve local communities, what roles can smaller community banks and credit unions play in partnering on public options? How are post office retail locations positioned for partnering on public options relative to community banks and credit unions? Are post office retail locations, community bank branches, and credit union branches similarly available in poor White communities and Black, Indigenous, and communities of color (BIPOC), and are they available in rural and urban communities? Or, or do post office retail locations serve unique or distinct communities? The findings in this brief report address these questions for understanding how to implement postal banking in ways that advance racial and economic equity within financial services. In these ways, postal banking can ensure that everyone has access to safe and affordable financial services, and a public option can be established for easily sending relief when the next crisis arises.

Key Findings

• Communities with post office retail locations tend to be underserved by other banks, including by smaller community banks with less than $10 billion in assets and credit unions. Sixty-nine percent of census tracts with a post office retail location do not have a community bank branch, or 14,938 census tracts representing 60 million people. Seventy-five percent of tracts with a post office retail location do not have a credit union branch.
• Some states could especially benefit from postal banking, where 80% or 90% of census tracts that have a post office retail location do not have a community bank branch. For example, 90% of Arizona census tracts, 94% of California census tracts, and 87% of Idaho census tracts with a post office retail location do not have a community bank branch.
• Both rural and urban communities could benefit from postal banking in terms of proximity to financial services that USPS retail locations could offer. In states like Nebraska and West Virginia, about half of tracts with a post office retail location but without a community bank branch are located in metro urban areas, whereas half of these tracts are located in non-metro rural areas in states like Montana and Vermont.
• Postal banking in some states could offer comparatively greater benefits to Black, Indigenous, and people of color (BIPOC) given that they often reside in census tracts with a post office retail location but without a community bank branch. For example, among these tracts in Alaska, the average American Indian / Alaska Native (AIAN) population is 26%, compared to only 13% among tracts with a post office retail location and a community bank branch.
• In some states, postal banking may benefit BIPOC living in rural communities. In Alabama, 11% of tracts with a post office retail location but without a community bank branch are located in non-metro rural areas. The average Black population is 39% among these tracts—higher than the state’s average Black population of 27% and higher than the average Black population of 25% among comparable tracts in metro urban areas. Taken together, these data indicate the potential for postal banking to distinctively benefit the state’s rural Black communities.
• Postal banking through USPS retail locations could uniquely serve communities that larger private banks have ignored and that smaller community banks have struggled to reach. While community banks can play a role in partnering on public options, efforts to bank unbanked and underbanked households in the U.S. will prove limited in their effectiveness if they rely solely on the presence of private sector bank branches, even community banks. Policy solutions will require both scale and affordability, precisely the attributes that the traditional banking sector has trended away from in recent decades.

Conclusion

As policymakers contemplate building back better from the coronavirus pandemic, ensuring all people in the United States can access essential financial services must be a top priority. Every person and community needs access to basic financial services to receive money, deposit earnings, save, and pay bills. Yet, as this report demonstrates, nearly 60 million people live in census tracts where there is a post office but not a single bank branch. In these communities, many people turn to currency exchanges, check cashers, and other alternative finance providers, which result in extractive fees. Many underbanked and unbanked households spend up to 10% of their incomes to cash checks and pay bills, more than their annual spending on food. As a result, the alternative financial services industry generates almost $100 billion annually, money that could have been saved, invested, or spent locally within a community.

There have been many well-intentioned market-based efforts to expand access to safe and affordable financial services. One of the most notable is Bank-On, an effort led by major banking systems to offer low-cost bank accounts with no overdraft fees and robust bill payment systems. However, these programs work in communities where participating banks already operate, and banking deregulation has allowed these banks to grow bigger in asset size and shrink their service footprints by closing branches. The consequences of relying on or deferring to market-based solutions were laid bare during the pandemic with each stimulus payment and new round of Paycheck Protection Program loans. As such, there is a strong case for public options for banking to fill existing gaps.

One of the many solid proposals for a public option includes Senator Sherrod Brown’s (D-OH) Banking for All Act. The legislation creates digital wallets (bank accounts) called FedAccounts and would be available for free at postal office retail locations and all Federal Reserve member banks. These accounts would enable an account holder to deposit funds, save, pay bills, withdraw cash, set up automatic bill payments, and access mobile banking. The FedAccounts would include ATM and debit card functionality, and balances would earn interest paid by the Federal Reserve. The proposal is simple and elegant. It embeds a free public option for retail banking within operating post offices, banks, and credit unions, taking advantage of economies of scale. Further, the proposal calls for the Federal Reserve to reimburse postal offices and participating banks and credit unions for all reasonable operational costs associated with providing FedAccounts. The Federal Reserve also assumes responsibility for developing online banking, security, and providing customer service.

The Banking for All Act can reach millions of people without access to safe and affordable financial services for the following reasons. First, in census tracts with a post office but no bank branch, people can open an account at their local post office. In these tracts, the postal bank would be the only access point for banking services. Second, free FedAccounts through the post office would be available to people who choose not to open accounts at banks because of high costs and fees. In census tracts with post office retail locations and community banks or credit unions, people will have multiple routes to open free FedAccounts. And finally, in census tracts without a post office branch but with bank branches or credit unions, people would have a public option for banking embedded within a private bank. Having side-by-side options of a FedAccount and a bank account offered by a private bank might force banks to lower fees. There is one caveat, though: as currently proposed, no overdraft coverage would be provided with FedAccounts.

There are other considerations connected to the Banking for All Act that are worth flagging. First, the Federal Reserve will have to invest in building the internal infrastructure to create the digital FedAccounts. The total cost of expanding its operational scope has not yet been quantified. Second, the lack of overdraft protections and small loans through FedAccounts is a limiting factor. Many potential users of the FedAccounts will likely still need access to payday loans and other usury loan providers to cover shortfalls between pay periods. And third, there are legitimate concerns that enabling FedAccounts at post offices might disrupt the banking industry. More specifically, banking experts worry that more people (in addition to the underbanked and underbanked) will choose the free FedAccounts if given a choice. While this concern is valid, the crowding out private, for-profit banking will not be an issue in communities without any banks. Private banks would have to open new branches in communities they have underserved or divested in order for FedAccounts to disrupt private banking.

Finally, serving underbanked and unbanked communities with the full suite of necessary safe and affordable financial services requires different public banking options at the state and local levels to finance affordable housing, green infrastructure, and small and medium-sized enterprises in BIPOC and disinvested communities. As these public banking proposals make their way through Congress and state and local legislatures, the Banking for All Act can be a groundbreaking first step towards equity in banking.

Download PDF of the full policy brief