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3. Let new approaches to banking flourish.
Businesses are using new technologies to try and lure more Americans into banking. The government needs to stop meddling with these new products.
Prepaid cards, the latest trend in stashing money, have nearly all the virtues of a bank account with few of the drawbacks, and they’re bringing order to the finances of millions of Americans. Consumers like prepaid cards because their fees are straightforward and they can’t overdraft; banks like them because they’re mostly exempt from the Durbin Amendment. In 2012, Walmart and American Express partnered to offer the Bluebird card, and so far users have loaded $2 billion into their accounts, with about a third of those funds coming through direct deposit. Spending through prepaid cards grew by 34 percent a year from 2009 to 2012, making it the fastest growing form of non-cash payment.
Prepaid cardholders need physical locations to deposit cash into their accounts, which is where the U.S. Postal Service sees an opportunity to step in. But given that prepaid customers are trying to save a buck, the last thing they need are storefronts heavily staffed by employees making a median wage of $53,000 plus generous pension benefits. NetSpend, meanwhile, is a prepaid network with 100,000 locations, or more than three times the reach of the USPS. PayNearMe offers its customers 17,000 locations for settling their bills with cash, and unlike post office branches many of these spots (such as the 7-Elevens in PayNearMe's network) are open every day of the week, 24 hours per day.
If lawmakers want to reduce the number of unbanked Americans, they should leave prepaid cards alone. Yet last year, Sen. Robert Menendez (D-N.J.) introduced a bill (for the second time) that would change the fee structure for prepaid cards and require that providers offer a toll-free number that customers can call with questions. And last month, Sen. Mark Warner (D-Va.) introduced a bill that would require prepaid cards issuers to be more transparent about fees—a truly pointless piece of legislation since these products already have straightforward fee structures.
Todd Zywicki, a senior scholar at the Mercatus Institute and an expert on banking regulation, says lawmakers haven’t moved on either bill because they’re waiting to see if the Consumer Financial Protection Bureau issues rules for prepaid cards. “A worst case scenario would be if regulators dictate which services prepaid issuers are allowed to charge for,” says Zywicki.
When prepaid issuers charge a fee for a customer service call, for example, it helps keep overall costs down. More red tape will only slow the growth of this promising product and push out the small players—just as it has in the traditional banking industry.
The cryptocurrency Bitcoin is another emerging technology that has tremendous potential to drive down the high fees associated with banking services. Foreign-born workers in the U.S. sent $48 billion to their home countries in 2009. For this, they pay an average fee of 6.18 percent. That’s because multiple intermediaries are involved in settling these payments, and they all take a cut.
Bitcoin doesn’t require an intermediary for a number of reasons. The entire network can see a record of every transaction, which protects users against fraud. And transactions are final so there’s no possibility of a charge reversal. Palo Alto-based startup Buttercoin is building a transmission network based on Bitcoin that could replace traditional players like Western Union.
Bitcoin has the potential to eliminate almost all the costs associated with domestic money transfers, which would turn the traditional banking industry upside down to the benefit of consumers. But regulators may stand in the way. Last month, New York held a two-day hearing on how to regulate cryptocurrencies, and the state is expected to introduce a licensing system that could slow innovation in the Bitcoin arena.
The goal for policymakers shouldn’t be to bring more low-income Americans into the traditional banking sector, but to allow entrepreneurs to rethink financial services to better fit the needs of low-income Americans. Banks have to earn the business of more American households by using technology to cut costs. A gimmicky idea for occupying a massive federal workforce with a dwindling number of letters to deliver isn’t the answer.
On the other hand, the post office does have a lot of branches. How about selling orange juice and gas?