U.S. Privatized Banking System Needs a Public Option

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Following the 2008 financial crisis, bank closures are leaving many people with impeded access to crucial financial services. The remaining bank branches disadvantage millions who cannot afford banking fees and many turn to vulturous lending companies for loans.

Much of the infrastructure needed to fix this already exists in the United States Postal Service.

While not currently used in the U.S., postal banking is a government-provided banking service that operates out of local post offices and works in many other countries. It can offer small checking and savings accounts, reasonable interest rates on loans and give communities banking services within reach.

About twenty percent of U.S. households use “alternative financial services.” These include payday lending companies and high-fee check cashing services that can be performed at far lower costs in the mainstream banking system.

Payday lending companies give short-term loans at exorbitant interest rates — typically about 400 percent annual interest or more. Santa Cruz’s downtown office of Advance America charges $35 for a two week loan of $200, which is an annual percentage rate of 456.25 percent.

These exorbitant interest rates can trap people in a cycle of debt. If a $200 loan at Advance America was not paid for one year, the interest would be $912.50, on top of paying back the $200, figures unheard of in mainstream banking.

In the wake of the 2008 recession, bank closures are creating “banking deserts,” or areas where access to in-person banking can be as far as 10 miles away. There are almost twice as many rural banking deserts as urban banking deserts. Rural areas with increasing Black and Latinx populations are more likely to develop into banking deserts than other areas.

There is no public option in the American banking system. Major banks such as Bank of America and Wells Fargo charge people fees if they do not maintain minimum monthly balances as high as $1,500 and deny loans to people with poor credit.

For decades banks have also systematically redlined Black and Latinx neighborhoods. This restricts communities of colors’ access to multigenerational savings through homeownership, inhibiting their ability to maintain their credit scores.

Average personal loan interest rates in 2018 for borrowers with “poor credit” were up to 21.7 percent higher than rates for borrowers with “excellent credit.” This disadvantages low-income people and people of color, making poverty more expensive.

Sen. Kirsten Gillibrand of New York introduced Senate Bill (SB) 2755 to institute postal banking. SB 2755 would offer people who may not have access to traditional banks low-interest, short-term loans that will decrease people’s reliance on payday loan companies. Postal banks could distribute loans to borrowers of up to $1,000 at interest rates just above rates on treasury bonds, currently at about 2 percent.

People need banks to cash checks, transfer funds, deposit money and certify power of attorney. Not having access to these services can push them into payday lending companies and high-fee check cashing services.

Low-income people are nickel-and-dimed out of their money through opaque banking agreements. Fifty-seven percent of households that did not use banks did so because they did not have enough money to keep an account.

Banks are effectively fining people for being poor.

Post offices already have branches all across the country, including in rural and low-income areas and turning them into banks for small accounts offers people a public option.

Without this option, banking disproportionately taxes America’s poor. Low-income people should not be subject to regressive banking fees and high-interest, short-term borrowing that can drive them into deeper debt. Postal banking could change this.