As President Trump and the Republican Congress continue their efforts to remove or weaken regulations put in place under the Obama Administration, changes to banking rules may be some of the most consequential. To understand what’s in store for American banking regulations, it’s important to look at their foundation, namely the Dodd-Frank Act that was passed in the wake of the 2008 financial crisis. Much of the current debate over financial regulation stems from the many provisions in Dodd-Frank.  Read on for an overview of three of the law’s most important components and a look at its future.

The Dodd-Frank Act

In the wake of the 2008 financial crisis, Congress passed a law that sought to place additional regulations on banks, improve and unify oversight, and protect consumers in order to prevent another crisis from happening. While the actual success of that law–the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Dodd-Frank–continues to be debated to this day, it is responsible for establishing many of the key components of the current regulatory system. The law created many new regulatory bodies that have churned out an even greater number of regulations, but for the purpose of this look, we will focus on three of the main consequences of the law.

Capital Requirements

The general idea behind bank regulations is that bank failures are extremely costly events that can pose serious risks to the entire economy, so we should regulate them to ensure their stability. One of the most universally agreed upon ways to improve the stability of the financial system is requiring banks to hold higher amounts of capital. Bank capital essentially includes all assets that do not have to be repaid, which allow banks to sustain losses if their other assets, like loans, decrease in value. Generally speaking, bank capital includes things like common stock and profits, which are used to fund a bank’s investments. While banks tend to fund most of their business with debt–namely deposits, which are a form of short-term, low-interest debt that is used to fund loans and other investments with higher returns–capital is simply another source of funding that also serves as a stabilizing force if a bank’s other assets decrease in value.

Writing in Slate, Matt Yglesias uses the example of a home loan to illustrate how bank capital works. When buying a home, you typically make a down payment and then fund the rest of the purchase with a loan. That down payment is your ownership or equity in the house–which you own and do not have to repay–and works along the same lines as bank capital. If the value of your house increases then the value of your equity increases. But if the home’s value decreases beyond what you have paid for it, then your loan is considered underwater–meaning you owe more than the house is worth. When the same thing happens to a bank, it becomes insolvent and fails. Higher capital requirements help ensure that banks can still operate when their assets drop in value.

If people chose a bank based on whether or not they viewed it as a safe place to put their money, then it would make sense for banks to have high levels of capital to appeal to customers. But because the federal government insures depositors via the FDIC, a bank’s capitalization matters less to individuals when choosing a bank. As a result, banks are incentivized to increase leverage and risk to increase their returns rather than capital to improve their stability. In return for the federal guarantee, however, regulators require banks to do their share to promote stability by mandating that they hold a certain amount of capital.

Dodd-Frank increased capital requirements in a number of ways. It set a higher leverage ratio–the ratio of a bank’s debt to capital–and created a separate risk-weighted requirement that uses looks at how risky different assets are. Mike Konczal, a fellow at the left-leaning Roosevelt Institute and proponent of Dodd-Frank, argues that both are necessary to ensure stability. A leverage requirement on its own would push banks to maximize their assets’ risk in order to increase returns. And because risk weighting is susceptible to bias, an overall leverage requirement helps act as a backstop in the event that risk estimates are off.

Some argue that requiring banks to fund their business with a higher amount of capital is more expensive for banks, which has effects on the economy as a whole. The thinking goes that forcing banks to fund themselves with capital reduces their ability to make loans and extend credit to businesses, which in turn slows the economy. While proponents of higher capital requirements note that although capital levels are higher than they were before the crisis, they remain low from a historical perspective and argue that the cost of capital is often overstated by banks. Some even dispute the notion that capital is costly for banks and argue that bankers’ opposition to higher capital requirements may have more to do with the way they are paid.

In addition to stricter capital requirements, Dodd-Frank also requires the banks to undergo regular “stress tests” to simulate their ability to handle various crisis scenarios. It also requires the largest banks to submit plans to wind themselves down in the event of a failure and set up a process for the FDIC and the Fed to liquidate a failing bank in order to prevent risk from spreading throughout the system.

The Volcker Rule

While you may not have heard people talk about the Volcker rule specifically, it’s more likely that you have heard someone like Senators Bernie Sanders or Elizabeth Warren discuss the need for Congress to pass a “21st Century version of Glass-Steagall.” Although there are important distinctions between the two, the original Glass-Steagall Act and the Volcker rule target the same issue. Both regulate or prevent banks from using deposits, which are insured by the FDIC, to make what are considered risky or speculative bets for their own gain.

For a better understanding, it’s worth taking a minute to look at the history of banking in the United States. The original Glass-Steagall law was put in place after the Great Depression to put a wall between commercial banks–traditional banks that take deposits and make loans–and investment banks–banks that trade investment securities and help companies issue stocks and bonds. In 1999, that law was repealed, leading to the formation of a handful of very large universal banks that do both commercial and investment banking. While most tend to think that the repeal of Glass-Steagall did not cause the crisis, the mega-banks that it gave rise to certainly played a role–allowing banks to grow quickly and experiment with new financial products likely contributed to the culture or risk-taking and lax regulation that worsened the crisis.

The Volcker Rule, named after former Federal Reserve Chairman Paul Volcker, sought to prevent the new universal banks from engaging in some of the riskiest behaviors of investment banks. Volcker played an important part in drafting Dodd-Frank and focused a lot of his attention on regulating risky bank activities. His eponymous rule sought to stop banks from doing what’s known as proprietary trading–or using their own money to make speculative investments for profit. Essentially, the law sought to mirror some of the effects of Glass-Steagall without breaking up the banks outright, choosing instead to limit the risks that institutions with a commercial banking arm could take. As Volcker sees it, the government has an interest in subsidizing and helping commercial banking with policies like FDIC insurance and potentially even bailouts–because taking deposits and making loans are important functions for the entire economy. However, he also believes that with a government subsidy, banks should not be allowed to take on excessive risk.

The Volcker rule has been criticized from all angles. Banks argue that it amounts to a significant attack on their ability to make profits, while reformers claim that it is full of loopholes and that it doesn’t fully accomplish its own stated goals. And those on the leftmost flank of the Democratic Party argue that the rule, and Dodd-Frank more generally, is not aggressive enough–while regulations under the law are notably more stringent than before the crisis, the government should have broken up the banks and forced larger structural changes onto the financial industry.

It’s also worth noting that the original goal of the Volcker rule was weakened when Dodd-Frank and the resulting regulations were drafted. Several loopholes were included that allow banks to continue to invest a portion of their assets in hedge funds and private equity funds as well as exceptions for trades done on behalf of customers.

The CFPB

When lawmakers set out to revamp financial regulation, they noticed several areas that did not have a single authority in charge–instead, a complex network of overlapping agencies was tasked with creating regulations to accomplish several different goals. A notable example of this was consumer protection, which prior to Dodd-Frank was under the control of about 10 different agencies. The fragmented nature meant that no single agency had a primary mandate to protect consumers, which made it difficult for the government to hold financial institutions accountable in cases where individuals were harmed. As a result, an important part of Dodd-Frank was the creation of the Consumer Financial Protection Bureau, an agency with wide powers to regulate and punish the misconduct of a wide range of institutions. The broad authority and unique structure of the CFPB have made it a controversial component of the reform law, with businesses and conservatives criticizing its authority and accountability structure and progressives arguing that it is essential to keep the industry in check.

The CFPB acts as a regulator in that it creates new rules for financial institutions and punishes them for misconduct. It is also streamlined the complaint process to help consumers take recourse with companies when they have a problem. It created a public complaint database, providing important information for consumers and helping regulators identify common problems. Aaron Klein, a fellow and research director at the Brookings Center on Regulation and Markets, compares the CFPB to Google and Yelp, as it provides a central place for information and reviews to help people make informed choices. In the five years that the CFPB has been in existence, it has provided more than $11 billion in relief for 27 million consumers.

Conclusion

As efforts to undo regulations passed in the wake of the financial crisis gain momentum, it’s important to look back at the law central to the current discussion: Dodd-Frank. Passed in 2010, Dodd-Frank marked the most significant regulatory revamp of the financial system since the great depression. It has been particularly controversial, attacked on the right for going too far and the left for not going far enough. Given its controversial nature, many of the law’s provisions are fairly vague, leaving a lot of latitude for regulators. As a result, the various agencies in charge of creating, updating, and enforcing regulations have a lot of control over how regulation works in practice. Changes to the underlying structure of the law will likely require new legislation, a prospect that does not seem likely given the need for bipartisan support in the Senate. But changes at the margins remain possible and even likely under the new administration. As President Trump continues his efforts to undo regulations and lessen the burden faced by businesses, we may see changes to the Volcker rule or even significant attempts to block its enforcement.

While there are a number of ways that existing laws and rules could be modified in the coming years, it’s important to remember the goals of the law that underlies the current regulatory framework. In many ways, Dodd-Frank was a compromise between various visions of financial reform, including new capital requirements to improve stability as well as the creation of new regulators and a complex set of rules to prevent risky behavior in the largest and most important financial institutions.

Kevin Rizzo

Kevin Rizzo is the Crime in America Editor at Law Street Media. An Ohio Native, the George Washington University graduate is a founding member of the company. Contact Kevin at krizzo@LawStreetMedia.com.

The post What are the Most Important Components of the Dodd-Frank Act? appeared first on Law Street.

Wells Fargo, America’s biggest bank by market capitalization, has apparently been scamming its customers by opening unauthorized deposit and credit card accounts for years. High sales targets and promises of bonuses prompted employees to commit illegal cross-selling–which is when you sell multiple products or services to the same customers. In fact, 5,300 employees have been fired for “inappropriate sales conduct” over the past five years.

On Thursday the Consumer Financial Protection Bureau (CFPB) fined the bank $100 million, which is the highest fine the federal agency has ever issued. Additional fines of $35 million and $50 million each are to be paid to the Office of the Comptroller of the Currency, and to the City and County of Los Angeles.

The director at CFPB, Richard Cordray, said in a press release:

Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses. Because of the severity of these violations, Wells Fargo is paying the largest penalty the CFPB has ever imposed. Today’s action should serve notice to the entire industry that financial incentive programs, if not monitored carefully, carry serious risks that can have serious legal consequences.

Banking analyst Dick Bove said on Friday that it’s time to sell your stocks in the bank. He told CNBC: “What Wells has done is it’s saying that it’s treating customers badly, it broke faith with customers. There is no business in the world that can treat its customers badly and continue to expect to grow.”

To gain back the public’s trust after something big like this, especially with the 2008 financial crisis fresh in mind, Bove said Wells Fargo would need to do something drastic. For example, forgive all student loan debt. He said:

If you do that to customers who have student loans, they’ll stay with you for life. It requires something big, comprehensive and meaningful. Whether it’s that exact action or some other action that they come up with, I don’t know. I think it requires a significant step to re-establish faith with the consumer.

Many Twitter users reacted to the news.

“Hello Wells Fargo, I’d like to open a checking account, savings account and two credit cards.”
“You’re in luck. We’ve already opened them.”

— Fake Dispatch (@Fake_Dispatch) September 9, 2016

And one popular question is why no higher executives have been held accountable.

It’s weird how 5,000 front line Wells Fargo employees hit on similar scams without any wrongdoing by high-level executives.

— Matthew Yglesias (@mattyglesias) September 9, 2016

Essentially, employees at the bank boosted their sales by secretly opening new accounts and then funding them by transferring money from customers’ existing accounts. This often brought along additional fees and charges for the customers. It’s been reported that more than two million deposit or credit accounts were opened in this fashion. According to Reuters, employees were told that most customers used six financial tools but that they should push them into using at least eight.

According to CNN’s Douglas Rushkoff, the scale of these scams show that it’s not just the behavior of one bad banker, but rather a symptom of extreme capitalism in the banking world. Since banks make money from extracting funds from customers who want to invest or make transactions, they need to make sure those processes happen. During a time with slow growth though, the bankers need to create some kind of growth synthetically, out of fear of losing their jobs or missing out on a bonus. An easy way to do this is extract more money from people who already are customers, by offering new credit cards with higher fees or loans with higher costs or new terms that are worse for the customer but better for the bank.

Wells Fargo has been known for its ability to cross-sell multiple products to the same customers. In a statement on the bank’s website it said:

Wells Fargo is committed to putting our customers’ interests first 100 percent of the time, and we regret and take responsibility for any instances where customers may have received a product that they did not request.

Wells Fargo has issued a statement regarding definitive settlement agreements. Read more: https://t.co/tCMOlGkfln. pic.twitter.com/DSEjFC1BpA

— Wells Fargo News (@WellsFargoNews) September 8, 2016

Emma Von Zeipel

Emma Von Zeipel is a staff writer at Law Street Media. She is originally from one of the islands of Stockholm, Sweden. After working for Democratic Voice of Burma in Thailand, she ended up in New York City. She has a BA in journalism from Stockholm University and is passionate about human rights, good books, horses, and European chocolate. Contact Emma at EVonZeipel@LawStreetMedia.com.

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By now, most people have become familiar with the additional hoop they have to jump through when buying things at the store. When you get to the checkout counter you do an awkward dance: do I swipe my credit card, do I put it into the chip reader, do I need my PIN, can I pay with my phone? The United States is currently in the middle of an update to its credit card infrastructure, an update that has been difficult for many consumers to navigate. What’s behind the recent changes and why have they just started now?

History and Background

The technology behind the original magnetic strip card was developed as early as the 1960s, but credit cards didn’t become a mass technology until the 1980s. Before then, their use was largely limited to business people and frequent travelers. The main issue originally holding plastic back was the cost. Namely, in the United States transaction costs were relatively low, a few cents each, because they were conducted over phone lines. In Europe, however, transactions were not done this way, leading to much higher costs. And using phone lines was actually a step up from the initial way credit cards were authorized, through carbon papers. When that was the case, people could commit credit card fraud by simply digging through dumpsters.

The video below gives a detailed account of the history of credit cards:

Because the European credit card system was so susceptible to fraud, European companies needed a more secure way to process transactions. Stakeholders got together and began to develop an alternative. This alternative, chip card technology or the formal name, EMV, was unveiled in 1994 and became widespread by 1998 in Europe (EMV stands for Europay MasterCard Visa). Despite widespread usage of EMV technology in Europe and other parts of the world, it has been slow to gain traction in the United States. It was only in 2015 that American companies and merchants began a concerted effort toward adopting EMV.

Adoption in the United States

So why did the United States ultimately decide to switch to EMV cards in 2015 when the technology had been readily available since the 1990s? The primary answer is the recent surge in credit card fraud, starting with the massive hack at Target in 2013 in which millions of credit cards were stolen. This hack, along with several other high-profile incidents, revealed the truth. Namely, companies were trying to secure customers’ data in the 21st century with cards from the 20th. The accompanying video looks at why the United States switched to EMV and what it means for cardholders:

However, the recent change was not the result of a top-down mandate from the government. In fact, the effort was led by a private group of credit companies including American Express, Discover, MasterCard, and Visa. The 2015 deadline was not a concrete point of no return, but one created by the same credit card companies. While companies did not have to meet the deadline by law, the liability for card-present fraud would shift to those who do not comply with the new technology. In other words, if a company or a bank did not adopt the EMV technology by that date and was the victim of fraud then it was on the hook for the cost.

While retailers had until 2015 to comply, automated gas dispensers have until 2017. Likewise, ATMs also have a little extra time–Mastercard and Visa ATMs must make the shift by October 2016 and 2017 respectively.

Advantages of Chip Enabled Credit Cards

Aside from following in Europe’s lead and satisfying the requirements of credit card companies, the EMV cards offer a number of advantages over traditional cards. First and foremost is security. Whereas traditional cards have one magnetic strip that can be easily copied onto a fake card, EMV cards do not. Instead, the EMV cards utilize the chip embedded in the cards, which creates a different transaction code for each purchase. As a result, if someone manages to get that transaction data, the code is unique to a specific transaction and cannot be used again for future purchases.

EMV cards work in two ways. They can be dipped into a machine, where they have to be held for a few seconds longer than it takes to swipe a traditional card. The card can also be held up to a contactless device, however, these devices are more expensive and less likely to be available as the technology is only now entering the American market.

Another distinction for these type of cards is the actual transaction process. Most of the models in the United States will be the traditional swipe or dip and then sign. Currently, most new credit cards have both a chip and a magnetic strip in case a store’s technology has not yet been updated, but in the future, cards will likely only have chips in them. There is an even more advanced version that requires consumers to enter their PIN numbers after dipping the card, but it costs more and is less likely to be seen in the United States anytime soon. In fact, this type has almost been discouraged as the major credit card companies that initiated the switch to EMV cards did not require them to be “Chip and PIN” models.

The video below from Mountain America Credit Union looks at the chip card and some of its advantages:

Disadvantages of Chip Enabled Credit Cards

Even with the deadlines, adoption of the EMV cards has been a slow process. By 2015, 25 percent of new cards issued were EMV. By the end of 2016, a year after the deadline, that number is projected to be only 75 percent. While part of this is due simply to technological limitations and the difficulty small banks can have when switching up their technology, there is more to the story that just that.

Namely, the switch will be very expensive. Updating the millions of traditional card readers will cost approximately $7 billion. On top of that is the cost to replace the cards already out there, which is estimated to be another $1.4 billion. Last, there is the cost  to replace ATMs and old software so that they can read the new cards, a change that may cost up to $500 million.

Although the chip cards’ chief advantage over traditional cards is safety, they are far from hacker-proof. Now instead of targeting the cards themselves hackers can target the machines that read them. Specifically, criminals can drill or even insert devices into card readers that are able to read the information protected on the cards. Using this information, thieves have been able to make counterfeit cards with magnetic strips and use them in places that do not have the new technology.

On top of security is also the issue of privacy, as the new cards also transmit a large quantity of data. Information, like a person’s present location, may become available if the card is hacked. Lastly, the cards are slower to process and many of the merchants required to make the shift either do not understand the technology or its benefits.

Finally, while it is not the fault of the cards themselves, experts suggest that stiffer security from the new cards will lead to greater rates of card-not-present fraud like online transactions. While these cards may improve security for in-person transactions, fraud may simply move elsewhere.

Conclusion

EMV cards have long been popular in Europe and other markets, yet Americans have been resistant. But that resistance crumbled when a series of hacks revealed how easily credit card information could be obtained. The new chip cards do offer advantages, most notably in terms of security. However, they also have a number of disadvantages and will not get rid of fraud altogether.

Not surprising then, even following deadlines for adoption required by credit cards companies, many American merchants have been slow to endorse them. Additionally, American consumers have also been slow to embrace the new technology due to its slower transaction times. Nevertheless, EMV technology is likely here to stay and will soon become the dominant form of credit purchasing. There will undoubtedly be a number of hiccups in the short term as the technology’s flaws are exposed. But ultimately, those same flaws are likely to be addressed and, in the end, just might make the average American’s wallet a safer place.

Resources

Iovation: The History of Credit Cards and How EMV Will Change Things

USA Today: Where is the EMV Card 10 Months Later?

CreditCards.com: 8 FAQs About EMV Credit Cards

Nerd Wallet: What Are the Downsides to EMV Technology?

Payments Source: EMV Tech in the U.S. Is Still Too Slow and Expensive

Gizmodo: How Criminals Can Easily Hack Your Chip & Pin Card

Computerworld: EMV Smartcards Offer Security Benefits Even Without PIN, Visa Says

Michael Sliwinski

Michael Sliwinski (@MoneyMike4289) is a 2011 graduate of Ohio University in Athens with a Bachelor’s in History, as well as a 2014 graduate of the University of Georgia with a Master’s in International Policy. In his free time he enjoys writing, reading, and outdoor activites, particularly basketball. Contact Michael at staff@LawStreetMedia.com.

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If you are tempted to take out a payday loan you might want to take Sarah Silverman’s advice and try literally anything else. The trouble is, there are rarely other options and here in the United States there are 40 million Americans who are “unbanked,” without access to the formal financial system. Shockingly, these Americans spend the same amount just to use their own money as they do to purchasing food–10 percent of their income.

Payday loans may be an evil but unless and until they are replaced with a better alternative they continue to be a necessary one. Eliminating payday lenders would prevent borrowers from taking on that particular pernicious type of debt but does not solve the underlying concern that many unbanked Americans do not have access to credit.

One of the proposed solutions to provide access to banking services for the unbanked is to use the United States Postal Service. Progressive politicians are advocating this method as an efficient way to reach low-income citizens in their neighborhoods. But some are uncomfortable with a government agency, one which is facing some financial difficulties of its own, taking on a problem that should be dealt with by market forces.

So is the existence of the “unbanked” really a problem? If so should we be using the post office to combat it?

A Solution for the Unbanked?

For a primer on the issue of how many Americans are currently unbanked and would benefit from an alternative to payday loans, check out this TedTalk by Mehrsa Baradaran.

As Baradaran explains, postal banks are actually something we already had and used to great success. From 1910 to 1966, the U.S. Postal Savings system provided a place for Americans to deposit funds in order to save money and have a way of paying their bills other than with cash. That is one of the chief problems facing the unbanked–the inability to have easy access to their own money and the high percentage of their money spent on just using their own funds. Paying a fee to access your own money or even just check your account balance is a significant financial burden and a service that the banked get access to for free.

With the advent of community banks, which offered a more attractive interest rate to depositors, the postal banking system seemed unnecessary and was eventually abolished in 1966. But the community banks–which were also proposed as a solution to the problem of the unbanked–removed themselves from low-income neighborhoods and contracted the number of people they provided services for. Nature abhors a vacuum and payday lenders went into that space, which is why people in low-income neighborhoods are often forced to rely on these types of lenders as substitutions for the banking services that the banked take for granted.

For the unbanked, there is simply not a banking location that they can go to. And one of the beauties of using the postal system for banking is that convenient locations already exist. Fifty-nine percent of post offices are in zip codes where there is either zero or only one bank. Other industrialized nations already have postal banking. In the U.K., the postal service does not actually provide financial services but allows third-party providers (like the Bank of Ireland) to conduct business there. France has actually converted its postal service into a financial institution.

The postal banking systems have been imperfect. In Japan, the postal banking system drew heavy criticism for its inefficiency. Yet 80 percent of Japanese citizens over the age of 15 had a postal bank account. China and India are also seeking ways to increase micro-lending and financial services to their nations’ poor through the use of postal banking services.

Potential Concerns

The concerns regarding postal banking fall into two main camps. First, there is the question of whether a postal banking system would help and whether the U.S. Postal Service could operate it efficiently and fairly. The second concern is less a practical question of ability and more an assessment of whether we want to use the postal service to promote a specific financial ideology.

The U.S. Postal Service seems to think it would be able to provide this service. The American Postal Workers’ Union makes the argument that postal workers are already in the very places that community banks have abandoned and they currently provide some financial services, like money orders. They would be able to provide small loans as well–like a payday lender but without extremely high interest rates.

The video below outlines the case made by the American Postal Workers’ Union for postal banks.

But the argument goes beyond the mere logistics of whether post offices can provide these services. The core concern is whether they should. Whether we want a government institution to be providing a service that is traditionally left to the private sector. After all, should the government really be involved in trying to undercut the payday lending industry based on a largely moral argument about “fairness”?

True Competition 

The private sector might argue that payday lending is actually fair. It provides a needed service–credit–at a rate that people are willing to pay. With so many of these financial institutions out there it is hard to argue that the industry is not competitive and given that these rates are still being accepted by many borrowers that must be what the credit is worth.

But that argument may misconstrue what true competition, one that will actually produce a fair price for something in a healthy market, consists of. Critics of payday lending would argue that true competition involves choices between meaningfully different options, not the illusion of choice between virtually identical competitors. A person living in an area where there are 10 payday lenders and no banks is not truly living in a competitive market. The individual lenders may vary their terms slightly but from the perspective of the borrower, they are still going to have to choose a payday lender. QuickCash versus KwikKash does not, at the end of the day, matter very much to the borrower or to the pernicious effects of the system.

The implementation of postal banking would provide meaningful choices to borrowers and create a true alternative to the payday lending industry. Then, when faced with that actual competition, they will be forced to either adapt or die. If a 400 percent interest rate really is a reasonable price to pay for the service they are offering then payday lending will survive the introduction of postal banking.

When you discuss postal banking there are two main ways that it can be structured–a postal bank that provides access to credit and one that does not. In the past, postal banks did not provide the type of micro-loans that would compete with payday loans. While a modern version of the postal bank could include small loans it doesn’t necessarily need to. Postal banks can provide other valuable services; most importantly post offices can serve as a place to save and access your money. If postal banking was re-instituted without lending, it would likely go a long way in solving the problem of access for the unbanked and underbanked.

Currently, people who live in a community where there is no bank have three main options to cash their paycheck. Payday loan providers that usually charge a 10 percent fee, check cashing services (some are part of larger retailers like Walmart) that typically charge a lower flat fee, and prepaid card accounts that allow you to deposit your money into the account but then charge a monthly fee for you to use the card. Those of us with bank accounts can get all of these services for free.

The Government’s Role

Postal banking would, of course, involve the government taking on a role that is now filled by the private sector. One fear is that this will stop the development of private sector alternatives to payday lending and stifle innovation in the provision of financial services. We may hate payday lending, but many feel that if it is going to be replaced that should be done by the private sector–through innovation in technology or some other form of financial institution. The government’s role should be contained to regulating industries, not replacing them.

But the postal bank did not, when it existed, kill other banks. In fact, the opposite happened. The rate of interest for the postal banks was capped at 2.5 percent to weaken their ability to compete with other banks. When community banks offered better rates, not surprisingly, depositors moved there–choosing a private sector institution that they felt better suited their needs. Postal banking also would not eliminate advances in technology and electronic banking. Those advances are driven by thinking of better ways to provide services to already banked people.  Applications that transfer money instantly between bank accounts for a minimal fee on your smartphone only benefit people who have smartphones and bank accounts. To the unbanked, these advances are meaningless–21st-century innovations in banking don’t assist people who are still stuck in the 20th. Creating a postal banking system would help the millions of unbanked Americans enter into the formal financial system, but it may not have much effect on companies seeking to further cater to those who are already included.

Conclusion

Postal banking may seem to some like a governmental overreach into an arena where the forces of the market should be in charge. Undercutting a private sector industry in favor of a government run charity-bank makes some people uncomfortable. Some may ask where we should draw the line between public good and social engineering. But postal banking already worked once in our nation’s history. And while it is not a complete solution to the problem of the unbanked and underbanked it could be used as part of that solution.

Resources

NerdWallet: Where To Cash A Check Without Paying Fees

Huffington Post, Postal Banking : An Idea Whose Time Has Come Again

The Washington Post, Should The Post Office Be A Bank?

Bloomberg QuickTake, Postal Banking

Slate.com, A Short History of Postal Banking

Goodreads, How The Other Half Banks

The Ultimate History Project, Postal Savings Banks

The Atlantic.com, Bernie Sanders’ Highly Sensible Plan To Turn Post Offices Into Banks

The American Interest, The Return of Postal Banking

Salon.com, Two Words For Hillary…Postal Banking

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

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