Why the Postal Service should be allowed to cash checks

Question: How could Congress enact a stimulus measure that would pay for itself and put $2 billion a year in the pockets of the most financially vulnerable Americans? 

Answer: Allow the U.S. Postal Service to cash checks. 

There are fundamental political disagreements over whether the Postal Service should operate a full-fledged bank. But few should disagree with the proposition that Americans should be able to cash their checks at a local post office. 

Today, millions of Americans cash their paychecks and benefit checks at check-cashing outlets. For many consumers, check-cashing services are a necessity because bank accounts are effectively out of reach. Bank fees are deceptively high. Banks advertise accounts with low monthly fees, but these are just teaser rates. Instead, banks earn most of their revenue on low-balance accounts from overdraft fees that are charged when a consumer’s withdrawal exceeds their balance. In 2020, banks took in more than $12 billion in overdraft fees, over five times the total amount that consumers paid for check-cashing services. 

Unsurprisingly, many consumers find bank fees to be unaffordable and choose to go without a bank account. Others would like to open a bank account but are on a blacklist of customers – maintained by the banks – who allegedly have unpaid fees or other past-account irregularities. 

Perhaps surprisingly, around half of the customers at check-cashing outlets actually have a bank account. Bank customers utilize check-cashing outlets when they don’t have time to wait for their check to clear. Think of the family that needs to pay rent or a small business owner under pressure to make payroll. Therefore, between unbanked and banked consumers, there is a sizable demand for check cashing. 

Check-cashing outlets charge up to 5 percent of the face value of a payroll or benefit check, and even more for a personal check. As a result, low-income consumers pay billions of dollars a year to turn their checks into cash or another usable form of payment. 

There are three main reasons why the Postal Service could offer check-cashing services for a few dollars a check rather than a percentage of the check’s value. 

First, rent makes up a significant fraction of costs for a typical check casher, but rent would not be an additional cost faced by the Postal Service. Partly for this reason, providers such as Wal-Mart and some grocery stores offer check-cashing services for fixed fees that are far lower than the percentage fees charged by check-cashing outlets. That said, these providers do not have enough locations to offer low-cost check-cashing services to all who need them. 

Second, each Postal Service branch can be operated at an efficient scale. Because check-cashing outlets compete on both price and location, economic theory predicts there will be an inefficiently high number of outlets. As a result, there will be too few customers per outlet, and each outlet will have to charge a higher price per customer to cover their fixed costs. In contrast, Postal Service branches that offer check-cashing services can be chosen strategically so that there are enough customers per branch to enable a lower, break-even price. 

Third, the technology and training needed to offer check-cashing services are simple. There are essentially no returns to scale in check-cashing that cannot be achieved by a single store. As a result, single-store, mom-and-pop check cashers regularly compete with the largest chains. In fact, many single-store outlets are less expensive than the national chains because the latter offer a wider variety of services.

There are also few risks. With modern technology and screening, the chances of accepting a bad check are negligible. An alternative, low-cost option would be for the Postal Service to provide an ATM-like kiosk that offers check-cashing services. Such kiosks have already been developed by convenience stores and are available to purchase from existing vendors. 

The usual objection that economists raise to price subsidies don’t apply to check cashing. Economic logic implies that consumers would be better off if the money spent on the subsidy were instead simply given to the consumer as cash. But a 5 percent fee to cash a paycheck acts like an income tax. Lowering the fee is therefore a pure income grant which, according to most economists, is the most efficient way to transfer resources.

Finally, there is no reason to believe that Postal Service locations would need any additional security protections beyond those associated with an ATM machine. Check-cashing outlets also permit consumers to transfer their funds to prepaid debit cards that are provided by Visa or Mastercard. The Postal Service can do the same.  

The Postal Service has offered money orders since 1864. The time for it to start cashing checks is past due. 

Prasad Krishnamurthy is a professor of law at U.C. Berkeley school of law.