Powerful alternatives to predatory lenders: Postal Service banking and public banks
The payday and auto title loan industry exists only because vast swaths of the United States lack even one traditional bank in the community. It is that simple.
The payday and auto title loan industry offers predatory loans to people who live in communities that lack access to traditional banks. In Illinois, the interest rate on these loans ranges between 197 and 297%. Nationally, the industry extracts about $90 billion from low and moderate income households annually.
To put this into context, the millions of Americans who rely on these usury loans sometimes spend more on interest and fees in one year than on food.
Now, thanks to a bipartisan group of Illinois legislators, Gov. J.B. Pritzker has a critically important bill on his desk that would cap interest rates at 36%.
As we await the governor’s signature, this is the perfect time for Illinois policymakers to start the next conversation for ensuring that every American has access to financial services: postal service banking and public banking.
Community banking in decline
To begin, let’s do some level-setting.
First, the payday and auto title loan industry exists only because vast swaths of the United States lack even one traditional bank in the community. It is that simple.
Second, traditional banking has radically changed in recent decades. In 1985, there were more than 18,000 such banks, but by 2018 there were only about 5,400. Today, just five banks — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and U.S. Bancorp — control half of all assets, or about $7 trillion.
As these banks have gotten bigger through mergers and acquisitions, they have closed branches in many lower income communities, in Indigenous communities, and in communities of color in urban and rural areas. And these trends do not even factor in decades of racist banking practices.
Third, everyone needs access to loans, but not all loans are created equally.
When banks lend, they create new money. These loans fuel home purchases and help people start and expand businesses. More money circulates when banks invest in a community by continually making new loans. As money circulates, property values go up, demand for homes rises, and new businesses open. This economic activity stabilizes the tax base, and the cycle repeats.
In other words, while state and local governments can encourage economic development, bank lending makes it happen.
When people rely exclusively on payday and auto title loans, there are fewer (if any) new home and business loans in their community. Without bank loans, there is no new money creation, which means communities get stuck in a cycle of disinvestment. This one-two punch can knock out communities for generations.
So, what can be done? Gov. Pritzker’s signature on the Illinois Predatory Lending Prevention Act would provide Illinoisans with much-needed financial relief. But state and local officials also should embrace two elegant solutions being debated in Congress: postal and public banking.
If Congress enacts the Postal Banking Act, the U.S. Postal Service will be able to provide basic checking, savings, bill payment and short-term credit solutions to working people and small businesses. These are services that the post office did, in fact, offer until 1967. With 11,000 post office branches, postal banking could be the oasis every banking desert needs.
The post office has the infrastructure to restart postal banking. It has a professional staff that already handles cash and sensitive materials. It has on-site vaults, planes and trucks, and in-house security. And it already processes about $21 billion annually in money orders.
Plus, polls show that 75% of all voters support postal banking. It is a bi-partisan political grand slam.
The Public Banking Act would help states and cities launch their own public banks. Instead of depositing hundreds of billions of public funds into big banks to benefit distant shareholders, public banks could invest money locally. State and local public banks could originate micro mortgages, finance affordable housing, advance clean energy projects, and make sure small and medium-sized businesses have access to capital.
Capping interest rates on loans is just one step in a broader set of solutions to guarantee every person, business and community access to fair lending and banking services. Banks have chosen not to provide these services, and payday and auto title lenders have stepped in with predatory offerings. Neither industry is going to change. Public banks are the perfect solution for filling these gaps.
Ameya Pawar is a former Chicago alderman, a fellow with the Open Society Foundations and a senior fellow with the Economic Security Project. Terri Friedline is an associate professor at the University of Michigan and author of “Banking on Revolution: Why Financial Technology Won’t Save a Broken System.”
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