The United States has two personal banking systems. One of these systems is carefully regulated. It benefits from substantial government subsidies, and it offers extensive protections to consumers.
The other system serves the poor.
“One of the great ironies in American life is that the less money you have, the more you have to pay to use it,” writes Mehrsa Baradaran at the beginning of her new book, "How the Other Half Banks." Baradaran, a law professor at the University of Georgia, is keying in on a deep social inequity: for millions of Americans, the main options for basic banking services are payday lenders and check cashers. These services charge exorbitant rates and fees. In many states, they’re barely regulated. They form an exploitative shadow market to the brick-and-mortar, federally-subsidized-and-guaranteed banks that serve more affluent Americans.
Baradaran is unconvinced that the private sector can offer good banking services to low-income Americans. Other than Wal-Mart, few companies are even trying. In "How the Other Half Banks," Baradaran looks for another option — ideally, an institution with a national network of locations already in place and a commitment to public service.
If only we had an institution like that! And, of course, we do: the United States Postal Service. The idea isn’t outlandish: a number of countries have postal banks. The United States did, too, from 1911-1967. The Postal Service itself has suggested this idea, in a 2014 white paper, and Bernie Sanders expressed support for postal banking in a recent interview. The Postal Service could offer low-cost checking services, and perhaps even affordable loans.
Bank access is a social issue that rarely gets attention in national policy debates. Baradaran is trying to change that. Over the phone, she spoke with Salon about post office lines, bank bailouts and why banking services are a bit like healthcare.
If we were to ask Bank of America executives why they don't serve a huge chunk of America, how would they explain it?
It’s just not their model. It’s incredibly expensive to service a small deposit. They would say, “Look, it’s not profitable for us, and we would lose money if we went after these deposits.”
What about community banks?
They have the very same profitability problem as Bank of America. They’ve followed the big banks out of these areas into higher profits, which are big loans, syndicates, huge commercial loans. The deposit area is just not a profitable business anymore, especially small deposits and small loans.
Still, it’s possible to open a small account at most banks. What holds so many people back?
Fees have a way of repelling small depositors, which I think is mainly the point. You put $100 in a bank, and you have to keep drawing it out, and you get a $35 dollar fee every time it goes below a certain number.
So, one, it’s a rational decision, if you have small deposits or volatile deposits. Two, there are substantial cultural barriers. Banks for years have had these marble buildings. That’s a real sort of class barrier — purposely so.
A lot of people speak a different language and don’t feel comfortable in the bank. A lot of banks are open 9 to 5, and low-income folks work during those hours, and they need to come in later. Payday lenders, on the other hand, are in their neighborhoods. They’re open all night. They speak their language. They have this informality, [even though] they’re huge, publicly traded, very profitable organizations.
Are there designers sitting at Bank of America or Citibank, thinking “How can we push away small depositors?”
I don’t think it’s quite that sinister. But when a business does not want a certain customer, they will repel that customer.
What does Walmart do when you overdraw on a Wal-Mart account? They just freeze it. They don’t charge you that $35, $45 fee. Now, Bank of America does do that. They could freeze it. But they don’t; they charge the fee. Why? I think it’s used as a repellent for the small accounts, whether they’re going to say it or not.
How do payday lenders and check cashers justify their exorbitant fees?
One argument that a lot of payday lenders use is that this is the market price. They’re taking a risk by lending to people who are low income, and the way lenders fight that risk is by high interest.
But for a market price, you would see a competition on price with these payday lenders. You just don’t see that. Payday lenders will lend to you at the absolute maximum interest rate allowed by law per state. People aren’t shopping around; they’ve exhausted their friends and family, credit cards or whatever. They go to the payday lender as a lender of last resort. They would borrow at almost any price.
As for the check cashers, why are they taking 10% off these checks? These are virtually risk-free. A lot of them are Social Security or military checks. The federal government isn’t going to default on their obligation to pay these checks. Now, [check cashers] do have to pay for the storefront, they have to pay for their personnel. It is the cost of doing business, certainly.
Can we do it better? Can we do it by not making the poor pay for things that the rich just get for free?
This reminds me of the debate over healthcare. Some people argue that healthcare works like a free market, and should be treated as such. The rebuttal is that when you’re dying or in terrible pain, you’re going to pay anything. It’s not like buying a car.
We talk about banks being short on cash — illiquid. They have more liabilities than they have assets. The Federal Reserve gives money to banks that are just illiquid. When [these banks] have a cash crunch, they just need to pay out and they’ll make it.
People, I think, can be seen the same way. A lot of people are just illiquid. They’ve got a cash crunch. I have to pay $500 to fix my car, and I’m good for it: if I can get my car, I can go back to work, I can make the money. But quickly that illiquidity can turn into bankruptcy. If I don’t get the $500, I have no income. But, if I get that $500, and it costs me $1,500 to pay down that $500 [loan], I’m all of a sudden bankrupt.
Banks are the same way. You just have a cash crunch: if you have a bunch of depositors coming in your door, that’s a run. I can either get that money quickly as a loan, pay them out, and be safe — or my bank goes under. We help those banks out. But with people who are financially dying, we say, “Tough. You should have been less stupid and made more money.” Whatever the cultural judgements are that we put on people with debt, we put it out harsher for the poor.
In general, we tend to blame the debtor, not the creditor.
Well, there definitely is a disdain for the banker and the moneylender, historically and today. We have a hatred of bankers, but we also, paradoxically, have a hatred of debtors. Rick Santelli, the Tea Party, you know: “These are despicable people; we don’t want to help them.” They talk about people borrowing from payday lenders as being stupid or shortsighted. That’s not the case. They’re using it to survive.
Certainly, you see rage directed against Goldman Sachs and other large Wall Street firms. It’s more difficult to generate sustained political outrage about payday lenders or check cashers.
You’ve got a collective action problem. Whenever the cost is borne by a population that is politically weak — these are politically voiceless people. How do you organize people who are being crushed by the load of life and poverty to really mount a serious effort against the payday lenders?
The payday lenders are very organized. There’s a very small group of organizations that have a really strong grasp on political parties and politicians at the state level and the federal level.
Access to credit is a necessity for healthy communities. Is there a right to credit, though?
I don't think credit is a right, in the way that we think of [the concept]. Access to credit for those who are creditworthy is part of the democratic principles of this country. There shouldn’t be false barriers or political barriers to access to credit. And certainly the state shouldn't favor certain credit institutions and their customers as opposed to others.
The federal government builds a foundation for the banks it regulates. You have this huge federal subsidy — and to even call it a subsidy, it’s like calling the wheels on your car a bonus feature. Without the state, these banks do not exist. So you have this federal government foundation on top of which the banking system rests, and then you've got a huge portion of the population that is totally left out of that government largesse. That becomes a selective democracy: when you have so much taxpayer money funding a system that purposefully leaves out those too poor to bank, I think it’s a social, a political problem. It’s not an economic problem any longer.
So is Wal-Mart’s bank the solution?
It could be. It seems like we're going that way. Look, we're in the world of national banking. Community banking has been dying since the '80s. I wish that it hadn't happened, but that is the world we live in. We are in a national banking era.
So we either outsource the needs of the low-income to Wal-Mart, or we bring in a government option or a public option, which I think the Post Office is incredibly well suited for.
What makes the Post Office able to bank this way, when others can’t?
I think Wal-Mart can do it or the Post Office can do it — those are our choices. You need a large institution; banking has become an economy of scale sort of business.
The Post Office could do it, because it’s located everywhere that banks are not located. It’s a community institution, and one of the last relics of the federal government in communities.
Once Wal-Mart learns how to turn a profit, we worry about what happens to their customers. Wal-Mart has a tendency to come into communities, underprice everyone, and then jack up prices after everyone else has gone out of business. Whereas the Post Office is still a not-for-profit institution.
So let's say I'm making $1,500 dollars each month. I'm breaking even most of the time, but it’s a close call. I decide to start banking with the Post Office. What would that look like?
One thing: you don't have to pay ten percent of your check just to cash it, like you would at the check casher.
This is my proposal, not something that the Post Office is considering, but how would lending work? You're breaking even, but one month you have an extra expense: your kid gets sick, your car breaks down, you need $500. You can go to a payday lender, and when all is said and done you end up paying 400 percent interest, you've rolled it over several times, and you're in debt. Or you go to the Post Office and get a $500 loan. They can price that at a much cheaper rate — something closer to 10 percent interest.
One thing the Post Office can do to protect themselves is to garnish your tax return if necessary. Where payday lenders will hunt you and spend a ton of money collecting that loan, the Post Office can use their position as a government entity to lower their cost of collection.
Could the Post Office actually handle this kind of expansion? Would the lines just get even longer?
They'll have ATMs, they'll have online banking, right? Any sort of services that banks offer, the Post Office can do. We really are thinking about a modern banking network that's just administered by the Post Office.
Now can they handle it? I think so. I mean, if Wal-Mart employees can handle it, postal workers can handle it. They get mail to everyone's door every single day. And yes, there are lines, but they’re doing it: they’re self-sustaining and they’re efficient.
It’s funny — I keep thinking of this as the government banking option versus the free market banking option. But it’s not like we have any banking system that’s somehow free of government influence.
There are all sorts of ways that our financial services can be improved by market innovations. I think that's all fantastic, right? I'm not talking about that. I'm talking about the government-supported banking system. Why is it that the poor, for their financial service and credit needs, have to rely on non-government lenders that end up charging them market or above-market rates?
And then we have this hugely government-supported banking industry that doesn't operate in a normal market, that operates with huge taxpayer wealth and federal subsidies, that ends up servicing the rest of us.
So this isn’t creeping government socialism?
If you think we have a private banking market now, you're wrong. If it were truly a private market industry, you would have had a lot of bank failures in 2008. Banks are special. To say, “Well, this new thing — postal banking or public options — that's socialism,” is a misunderstanding of how banks actually work.