February 20, 2014
A new U.S. Postal Service product offering and one recently proposed could generate new revenue via direct financial services to consumers and same-day metropolitan package delivery. But pertinent questions of regulatory, legal, privacy/data security and other implications merit timely consideration. A report by the Postal Service’s Inspector General suggests that partnerships with financial sector providers could leverage the postal network to sell a suite of new consumer financial services. Meanwhile, market tests of same-day package delivery demonstrate how the Postal Service’s monopolies and vast network position it to benefit from competitive advantages over private providers that include subsidies from monopoly revenues.
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The Postal Service’s resolute present leadership has, understandably, prioritized new product offerings that can generate new revenue streams to offset declining mail revenue. Prominent recent examples the Postal Service is considering are financial services and same-day package deliveries.
Both new product lines could bring the U.S. Postal Service much-needed new operating revenue, so the attention they have received from media and some policymakers, while unusual, is understandable. After all, the Service has lost $25 billion in the last three years and projects even deeper declines in mail revenue in the coming decade.
But while it is understandable that adding new revenue streams that compete with the private sector would gain the attention of Postal Service management, that alone does not make them a good idea. Both were announced as strategies to leverage its vast and highly-visible networks, and in doing so both would gain competitive advantages against private-sector providers.
In an era where taxpayers could potentially be on the hook for deepening postal budget shortfalls, before investing tens of millions of dollars to expand services into radically new areas such as financial services, or expanding existing package offerings to directly compete against private companies, policymakers should adequately consider significant policy issues, including regulatory, legal and privacy/data security implications.
Consumer Financial Services
Last month, a white paper by the Postal Service’s Inspector General proposed that the Postal Service begin offering financial services to Americans who do not currently have bank accounts. Noting that this includes 68 million American adults, many living in “economic deserts” where limited options drive them to pay often-exorbitant interest and fees to payday lenders, the report argued that the extensive network of post offices would be ideal to use to offer a practical alternative. The Inspector General’s idea found new momentum when Massachusetts Senator Elizabeth Warren raised the idea as a prospective proposal.
Presumably, entering into a business segment completely different from its core business would require significant investments in both time and resources. However, prior to even considering the actual business case to justify the investments, the following policy considerations should be addressed:
Regulatory Because of the Postal Service’s government monopolies, allowing it to compete with private companies in the commercial marketplace would require a regulator to ensure that it not be permitted to leverage these monopolies to compete on unfair terms. “This could potentially create an uneven playing field and raises a host of regulatory issues,” noted the American Bankers Association’s chief counsel. The Postal Regulatory Commission is not currently configured to be a financial services regulator.
There are sound precedents for such concerns. In 2003, the Consumer Advocate of the Postal Rate Commission (before Congress codified its present regulatory authority) documented a pattern of dubious business practices for the Postal Service’s consumer insurance products, including claim payment rates so low they were “unheard of” elsewhere in the industry, opaque changes to coverage limitations and unreasonable claims resolution periods.
Legal It is not clear whether Congress would need to change existing postal laws to permit the Postal Service to engage in new financial services. Prior precedents, like postal clerks selling money orders or prepaid calling cards, are somewhat applicable, but any new lending practices would need to be defined legally as postal products to be permissible under present law. In addition, it must be established which banking laws and regulations should be applied. Many laws and regulations apply to banks to protect consumers and should likely be equally applied to the Postal Service is they enter into the competitive financial services arena.
Operational The nation’s post offices are generally well located to reach the population of unbanked consumers, as the Inspector General’s report noted. Partnering with banks rather than building and managing its own team of qualified consumer financial service professionals, as suggested, might be preferable. But installing them viably within existing, often small, post offices alongside postal employees working under strict union rules would create separate challenges.
Already, post office customers in a number of regions face average wait times of five minutes or more, and online community discussion boards frequently describe uneven (or worse) customer service from postal clerks. If the addition of new financial services were to worsen either situation, further erosion of the postal consumer relationship could accelerate revenue losses.
Data Security and Privacy The same Inspector General’s report suggests giving USPS control of a far-reaching database of information about consumers, only the most recent time this idea has been raised by postal stakeholders. Additionally, it proposed securing loans through the Treasury Department’s authority to seize tax refunds due to borrowers in default. The report also suggested that the Postal Service serve as a lead agency in the International Financial System (IFS) of the Universal Postal Union. The IFS provides new channels for money transfers as well as a “safer and faster digital alternative to domestic and international paper money orders.”
Without detailing how the arrangements might work, such initiatives would place the Postal Service squarely in the information stream of customers’ personal finances, which creates significant concerns regarding data privacy and security. Given the magnitude of recent data breaches that have taken place, these concerns should be thoroughly vetted before committing new resources.
Same-day delivery, now coined “Metro Post”, was unveiled the week before Christmas in San Francisco, for what was declared a one-year market test. Plans were also announced to introduce the service in New York City. Under the Metro Post service offering, customers that reside in the same metropolitan market as the shipper can make an on-line purchase before 2:00 PM and expect delivery later the same day, between 4:00 and 8:00 PM, at a flat rate of $8 for packages up to 25 pounds.
Postal Service managers announced that they were targeting e-commerce marketplaces for the new product. “Building relationships with prominent retailers like 1-800-FLOWERS.com will help us leverage our capabilities by making same-day delivery a standard option on retail websites,” noted postal executive Gary Reblin.
As the program was launched, it almost immediately ran into problems, as the San Francisco market test reportedly had problems attracting shipping partners. While it may be too soon to fully evaluate the tests, they should trigger some important concerns, particularly over subsidizing the new competitive endeavor with monopoly revenues.
Current Postal Service leadership has made expanding its package business its highest priority in recent years, including offering definite-day parcel delivery, greatly enhancing package tracking, and offering additional free insurance for certain packages, all at little or no extra cost. Channeling dollars earned from its statutory monopolies to its package business in ever-increasing amounts has allowed it to keep package rates low and fund prominent advertising campaigns to promote using them.
The Metro Post plan seems to be an attractive way to use a delivery fleet the Postal Service already owns to deliver after regular business hours, when they would not otherwise be in use. But absent an equitable way to charge the new, competitive business for the use of these assets, the new plan amounts to a new subsidy required of monopoly customers, who were recently handed a 6 percent rate increase.
Prices for competitive products increased only 2.4 percent. Combined with other unique advantages of the postal monopolies, like immunity from parking tickets, these can produce unfair advantages against private courier and delivery companies.
Last year, the Postal Service noted in a filing with the Postal Regulatory Commission what appeared to be a new costing formula for its competitive product offerings, where competitive products would be would be charged for the use of network assets only if they were used exclusively by competitive products.
This costing methodology seems in conflict with the Commission’s mandate in federal law to “prohibit the subsidization of competitive products by market-dominant products.” If same-day packages benefit from “free rides” on trucks, sorting equipment and other assets, and are priced accordingly, the resulting subsidy paid for by monopoly postal customers would be significant, enabling the Postal Service to take market share from private employers at the expense of those who use the government monopoly.
Packages often require specialized sorting and handling equipment different than those used for letters. Such equipment can be expensive to install and operate. Absent new measures to increase transparency and prevent subsidies, it becomes even more likely that market distortions will tilt the playing field for same-day delivery unfairly.
Finding new revenue for the Postal Service will be critical to preserving the institution in the internet age. But as these two new proposed products demonstrate, getting the details wrong could be harmful to consumers, produce market distortions, and ultimately do more harm than good.
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