In banking policy circles, there are issues that are argued over and over for decades on end. The fight over Glass–Steagall restrictions is one such example. The act was passed during the early 1930s, slowly reduced in scope during the 1970s and 1980s, and finally most of its restrictions were repealed with the Gramm–Leach–Bliley Act of 1999 (GLBA). The financial crisis less than a decade later reanimated the conversation on banking activities, with many fingering the changes up to and including the GLBA as one of the causes of the financial crisis.

Another issue with a similarly long shelf life is the argument over allowing the post office to provide banking services. University of Georgia law professor Mehrsa Baradaran is one of the most high-profile advocates for a modernized version of a postal bank and she lays out her vision in How the Other Half Banks. Previously, she wrote The Color of Money: Black Banking and the Racial Wealth Gap.

Baradaran refers throughout How the Other Half Banks to a “social contract with the banks.” This contract has evolved over time, but its history shows that “banking policy has always been deeply intertwined with politics.” As an example, she points to the financial safety net for banks, which includes federal deposit insurance, the ability to borrow from the Federal Reserve, and government bailouts. Those interventions, she argues, justify policies to help the unbanked: “Many describe modern banks as private enterprises but this is illusory…. To be sure, individual banks are private companies, but each of these private banks sits atop a foundation of state support.” The implication is that financial institutions cannot survive without some form of government backstop.

Emotional appeal / The title of the book is a clever twist on How the Other Half Lives, Jacob Riis’ 1890 photojournalism exposé of abysmal living conditions in New York City during the Gilded Age. The book was a classic example of muckraking journalism intended to appeal to people’s emotions to bring about social change. Similarly, Baradaran’s goal is to present the dire situation that the unbanked and underbanked face in order to trigger changes in the way policymakers approach banking policy.

She presents data that the average unbanked family has an annual income of $25,500. Nearly 10% of that income is spent on fees related to financial transactions. For many of these families that translates to more than they spend on food. Many of these expenses are incurred through non-bank outlets that specialize in check cashing, money orders, remittances, payday lending, and pawn brokering.

Banks with a soul / To delve deeply into why the unbanked and underbanked have very few options in the formalized banking system, Baradaran traces the history of financial institutions that were intended to address the needs of the entire population, not just cater to those at the top. For example, originally “credit unions cut out the owners and the profits in order to serve the poor. Their motto was ‘Banks of the people, by the people, and for the people.’ ” These “banks with a soul” included savings and loans, Freedman’s Savings Banks, building and loans, Morris Banks, and industrial loan companies. But in each case they either ceased operation or no longer serve the masses as they used to.

In the case of credit unions, the industry boomed in the postwar decades, growing from 3,372 credit unions serving 640,000 members in 1935 to over 16,000 credit unions serving 8.1 million members in 1955. But Baradaran argues that over time credit unions’ focus on the poor eroded and “the nature of the movement had changed greatly … and developed more of a middle-income orientation than one devoted to lower-income groups.” Large and profitable credit unions became much more common in the 1970s and 1980s. Today, credit unions are much like mainstream banks. Her conclusion from this recitation of business models of old is:

The movements that succeeded in serving the poor received heavy support from the federal government. And they only succeeded in achieving their mission insofar as they remained committed to a public purpose and explicitly rejected a purely profit-oriented model.

Exploitation and paternalism / So what options do the unbanked and underbanked have as they struggle with executing financial transactions on a day-to-day basis? Baradaran begins with a lengthy history of usury, the practice of lending money at unreasonably high interest rates. This leads to the inevitable focus on payday loans, where “the borrower must have a regular paycheck against which she borrows, usually up to $500, with a typical term of anywhere from a week to a month.” Ideally, borrowers would pay the loans back and that would be the end of them, but typically such loans are rolled over or otherwise extended. According to Baradaran, a borrower supports the loan with “either a postdated check or permission for direct withdrawal.” The annual percentage rate comes in at about 400%.

Some states have reflexively and paternalistically banned such loans because they consider them usurious. Baradaran makes clear that the borrowers desperately need these loans and an outright ban is extremely harmful:

These are real people who live and work in cities and towns, poor neighborhoods and wealthy ones…. They borrow to pay for things that are widely considered essential. They borrow with forethought and with care…. And fringe lenders are the only ones meeting this large market demand because banks, credit unions, and other mainstream lenders have chosen not to.

She rails against “paternalistic financial advice against debt, which is based on the assumption that if people only realized how bad debt was, they would not take out loans.” She lectures that “it is especially unfair to morally oppose the use of fringe lending when there are no meaningful options.”

Why not banks? / Baradaran claims that commercial banks largely ignore the unbanked, citing studies that the annual administrative cost of a checking account is $250 to $300. But she also criticizes the profit motive for the high overdraft and other fees charged:

Several barriers keep mainstream banks from serving the poor—the most important is simple math. Banks can make much higher profits elsewhere. The poor may need banks, but banks most definitely do not need the poor. Banks’ transaction and overhead costs are much the same whether they lend $500 or $500,000, but, of course, the larger loan yields a much higher profit.

Where banks do offer services, she further claims that high fees related to bank accounts somehow manage to give banks a twofer: “These fees are used both as a way to repel and punish low-balances and as a significant source of revenue.”

The postal option / So we are left with 70 million Americans without a bank account or access to traditional financial services. The climax that every reader knows is coming at the end of the book is the introduction of postal banking as the answer to the struggles of the underbanked and unbanked.

The idea is not unprecedented in the United States. President Ulysses S. Grant’s postmaster general, John A.J. Creswell, proposed a postal bank in 1871. After four decades of back and forth in Washington, it finally became law under President William Howard Taft in 1910. (Democrats resisted.) The United States Postal Savings System (USPSS) was born. The USPSS was popular everywhere, especially among immigrants who apparently had a great deal of confidence in the government because of postal banking’s European roots. But after World War II, the deposits flowed out of the USPSS and into the commercial banks, which could pay higher interest rates. The USPSS was abolished in the late 1960s.

In her final chapter, Baradaran argues that it is time to revive “a public option in banking,” as it is consistent with the centuries-long social contract between banks and the government. She claims that “the post offices could offer these services at a much lower cost than the banks and the fringe industry.”

In a final section, she anticipates critiques of her plan. Amazingly, she cites Fannie Mae and Freddie Mac as good examples of how government involvement in financial markets can achieve social policy.

Notwithstanding the fact that Baradaran recognizes the role of politics in banking policy, a gaping hole in her defense is that she ignores how a postal bank would politicize credit allocation even more than it already is. The combination of a postal bank along with an economic recession would surely lead to political intervention on many fronts. There would likely be demands for forbearance in addressing past-due loans and calls for greater lending to juice the economy. Private market solutions, such as expanded powers for Walmart and others to compete and mobile and peer-to-peer banking options, which she mentions briefly, would be much better alternatives. Equality banks, which facilitate cost-sharing among small banks in order to help them provide short-term, small-dollar loans, also hold some promise but she does not mention them.

The past 100 years have seen the government get progressively more involved in the banking industry. During that same time and by many measures, we have more instability in our financial system and greater disparities between banking services for the haves and the have-nots. If readers truly believe that more government is the answer, they will find Baradaran’s prescriptions to their liking. Everyone else should still find of interest her history of the provision of credit to the underbanked and unbanked and her analysis of banning payday lending.