Public banks and the Postal Service can’t help borrowers who need small loans

A recent opinion piece advanced the idea that the Postal Service and public banks can fulfill the demand for credit, as the so-called “Predatory Loan Prevention Act” decimates non-bank lenders in Illinois. This is extremely unlikely.

Public banks, funded by tax dollars, are not common in the United States. Few, if any, make small-dollar loans to non-prime borrowers. This is because economic realities prevent it: The cost of making nonprime loans is so high, the risk so great, and the returns so low, it is not possible for banks to cover the costs of making them.

In the past, government has used subsidies to help commercial banks subvert reality, but all have failed. We can expect similar tax dollar-funded subsidies for any public banks that might try non-prime lending, but they will simply retread a well-worn path to an unmistakable conclusion: Banks cannot successfully balance their business models with the provision of safe and affordable credit for non-prime borrowers.

As for the post office, a great deal has been written about the likelihood of reintroducing banking services in post office branches. The need for significant new investment, infrastructure and training has many cautious about its feasibility. One also gets the feeling that its proponents are less concerned with the provision of small dollar credit than with creating a new revenue source for the ailing U.S. Postal Service.

The sad thing about this is that Illinois always had an alternative to payday lending, in the form of local installment loans. The new law treats these safe, affordable loans the same as payday. The losers are working Illinoisans who have just had the rug pulled out from under them. Most will understand that the chance of public banks or the Postal Service riding to the rescue in any useful time frame are vanishingly small.

Brett Ashton, executive director, Illinois Financial Services Association