A public option for banking

Trying to get basic banking services to cash Social Security and disability checks was a persistent source of anxiety for Patricia Geary, a 65-year-old Philadelphia resident. She receives her payments in paper form, but since she didn’t have a checking account, she had trouble figuring out how to convert them into usable form.

“It was so stressful,” she told me. “It put me in such a fragile and depressive state that I had to seek out professional help at times.”

Commercial banks have too many hidden fees and minimum balances that are too high to help her. The check-cashing places she relied on require large fees for her to get cash and even more fees to convert some of that cash into money orders to pay bills. Keeping her money entirely in cash made it hard to budget well and left her vulnerable to theft.

Luckily, a public option became available. Geary received a Direct Express debit card that loads her government pension and disability payments. The card has low fees and none of her old financial hassles. “It was so much more flexible and allowed me to be much better at budgeting,” she said. “It’s like I have a bank in my pocket.”

There has been great interest in the idea of postal banking ever since the inspector general of the U.S. Postal Service released a white paper in January that went viral after Elizabeth Warren endorsed the idea. According to the proposal, the USPS would offer financial services, including a debit card much like Direct Express, to cater to the nearly 68 million Americans with limited or no access to a formal banking account.

This idea is not new. In fact, the USPS used to run postal banks throughout much of the 20th century, and they are still popular internationally. Although these facts are widely reported, what often goes missing is that a version of the postal banking strategy is in play right now — Direct Express, run by the Treasury Department in partnership with Comerica bank. It currently benefits Geary and more than 5 million other people, and it’s an overwhelming success. To expand the program, either through the USPS or without it, is both sensible and crucial to providing economic security for all Americans.

A core idea of the USPS’s report is to offer “a Postal Service branded open-loop reloadable prepaid card, perhaps called the Postal Card,” the report reads. The USPS suggested it could rely on partnerships with a bank to provide the cards as well as back-end management and services. But the USPS would set the terms of the cards and ensure that they have strong consumer protections. Since the USPS is so large and would bring such a mass of clients, it would have leverage to negotiate the best deal.

This is exactly what the U.S. Treasury has done with Direct Express. The program allows unbanked recipients of Social Security, federal disability and a few pension-related federal programs to receive their benefits on a debit card. The program emerged from congressional efforts in the 1990s to move from paper checks to direct deposits for these benefits. Congress tasked Treasury to make sure there were low-cost accounts available to the unbanked so they could access deposits. The department tried to find various ways to encourage banks to offer low-fee, accessible accounts, with only limited success. (Sound familiar?)

In the mid-2000s, Treasury officials decided to go with a new strategy: debit cards. On the private market, they have high fees and weak consumer protections. So people at Treasury did some significant thinking about the design. By 2007, the department initiated a competitive bidding process for the cards, and Comerica won the account by offering the low-fee schedule the cards now have. The cards went live in 2008, and last year Treasury began ending paper checks and using only debit cards.

The program is overwhelmingly popular, with 95 percent of users satisfied with the card, according to surveys — including a recent one by KRC Research — and 93 percent saying they would recommend the card to others. Why are the cards so successful? Because the government is playing a key role that the private market could not. Though Treasury has partnered with a private bank that runs the accounts, it used its size and authority to negotiate the best terms available — terms an order of magnitude better than ordinary individuals can do for themselves on the private market. There are no credit checks, sign-up fees, monthly account fees or minimum balances, and many features are free. People can use the cards at ATMs, make purchases with them and get cash back with those purchases.

“The bank has extended consumer protections for debit cards to these cards,” Margot Saunders of the National Consumer Law Center told me. “They normally are not applicable to prepaid cards like these.”

This is a public option at work. Though the public option has been mentioned in debates about health care reform — the idea that the government could offer its own health insurance program as a competitor to private health insurance — it can be extended to many other contexts. In fact, government’s ability to offer a public option is one the easiest and most powerful ways of regulating an industry. Rather than using a confusing and ineffective array of sticks and carrots to encourage banks to offer decent services to the poor, the government can take steps to ensure that such services are made available. Even better, the government here has used its size, authority and resources to secure a better deal than these unbanked consumers would normally get.

The Direct Express card isn’t perfect. As Rebecca Vallas of the National Organization of Social Security Claimants’ Representatives told me, “Customer service has often been a problem, particularly in the early days, which is an extra-important problem when dealing with economically vulnerable groups.” As Saunders emphasized, the effort by Treasury to push everyone to debit cards has left many elderly people, who often are not used to electronic banking and may prefer paper checks, confused about their benefits and how to access them.

However, compared with the predatory nightmare of the financial services market, it represents a major step forward. And it captures the promise of postal banking.

The idea that the USPS should offer debit cards with basic financial capabilities is simply a logical extension of the Direct Express program — a proven way of preventing banking services from skimming off the retirement security we provide as a society. The USPS’s size and coverage across the entire country would give it extensive leverage.

The two programs need not be exactly alike. One major difference is that the proposed Postal Card could have money added to it, an essential feature for low-wage workers who often balance multiple checks but less important for retirees with fixed incomes. The line between public and private could differ, with the USPS taking more of a role than Treasury, which outsources core banking services to Comerica.

So if this is such a sensible idea, what is holding it back? The financial industry, unsurprisingly, hates it. But vacancies on the USPS’s Board of Governors are also a problem. As journalist David Dayen noted, these vacancies should be filled by the president with people interested in bringing these successes to a larger audience.

The ability to participate in markets freely is a fundamental American right. That so many citizens struggle to access money without becoming entrapped in a predatory nightmare is an affront to our values. Luckily, we have the tools to solve it. The only question is whether we will use them.