Banks find opportunity in Postal Service woes

The bank industry, struggling to make the profits it used to, is using the struggles of another industry for its marketing: The Postal Service.

JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N), Citigroup Inc (C.N) and Wells Fargo & Co (WFC.N) are all using the looming threat of postal service cuts to sell bank services such as electronic payments and remittance pickups that can speed payments likely to be slowed by diminished mail service.

“It is a conversation starter,” said Daniel Peltz, head of Wells Fargo’s Treasury Management division.

For banks, electronic transactions save as much as one-third of the cost of processing checks, according to industry estimates. The potential savings are greatest for bigger banks, which reap additional economies of scale by running more transactions through the computer systems they have built.

Banks are looking for any chance to save money these days, as tough markets and a weak economy hit their profits, and traditional revenue streams dry up due to stricter regulations.

For bank customers, the new electronic payments and other services offer savings, too.

Greg Kerwick, a managing director in JPMorgan’s Treasury Services unit, said his team is telling customers they might have to wait one to four days longer for invoices to reach customers and payments to return by mail, if Saturday postal delivery is eliminated.

His division, which helps 25,000 businesses with cash management, estimates that waiting an extra two days for payment would require a company that receives $5 billion of mail payments a year to come up with an extra $27 million of working capital.

To save that money, of course, customers must pay. For example, using lockbox services – where the bank picks up checks for businesses from postal plants seven days a week – can mean as much as $2 per check for the bank, which also can earn interest income during the maximum of three to four days they hold a payer’s money before some checks are cleared, said Nancy Atkinson, a senior analyst with consulting firm Aite Group.

This “float period” could become even more valuable as interest rates rise in the future, she said.

Banks, however, may find it challenging to win more payment business because a delay in mail service is advantageous to bill payers who want to hold onto their funds as long as possible, Atkinson said. Payers typically drive the decision making around how they pay a supplier, surveys by Aite Group have found.

If more business turns to electronic payments, that could further hurt the Postal Service, which lost $5.1 billion in fiscal year 2011 and could see annual losses upward of $21 billion by 2016 if major changes are not made, Postmaster General Patrick Donahoe has said.

President Obama, in his budget proposal in February, called for an end to Saturday mail delivery and other cost-cutting by the Postal Service. The Senate is to consider a bill this week that would allow the Postal Service to consider ending Saturday mail after two years.

The service also has plans to close more than 200 mail processing plants, which would end next-day delivery of First Class Mail.

“Everybody has a desire to get away from checks and move more electronic,” JPMorgan’s Kerwick said. “This is placing greater urgency around making that happen.”

“The mail will take longer to cycle through,” Kerwick said.

To be sure, many mid-sized businesses use check-writing software and are in no rush to install new systems, said Lex Litton, a consultant with Phoenix-Hecht, which specializes in collecting paper checks at third-party processing centers.

A little more than half of payments received by larger companies still arrive by check, said Litton. For smaller companies about three-quarters are on paper.

Overall, paper payments to businesses are decreasing by a couple of percentage points a year, Litton said, citing surveys by his firm.

One reason for slow adoption is convenience. Sending checks in envelopes can allow businesses to easily add information that clarifies what they are paying and what discounts they might be applying.

“I’m an advocate of both” paper and electronic payments, said Ron Tauscher, a senior product manager in Citigroup’s Global Transaction Services business.

Tauscher said he is discussing the Postal Service issues with Citigroup’s customers. “It is clearly an opportunity to talk about their receivables,” he said.

For payments still sent by check, some banks offer lockbox processing centers across the United States. Citigroup, JPMorgan and Wells Fargo together account for 35 of them. Crews from the centers go to nearby Postal Service sorting facilities around the clock to pick up envelopes with checks to be deposited quickly.

Known as remittance mail, the envelopes would get special treatment under the Postal Service’s plans to cut costs, noted Litton. Banks would be able to continue to pick up those envelopes seven days a week even as first-class deliveries to businesses would become less frequent.

As a result, businesses may sign up for the lockbox services, Wells Fargo’s Peltz said.

Litton said remittance mail would still likely move more slowly than today, though that is not certain. Regardless, the threat of delays is useful to the banks. “This looks like an opportunity to say there is one more advantage to electronic payments,” said Litton.

At Bank of America Merrill Lynch, Paul Simpson, head of global transaction services, said the bank is talking to clients about electronic payment options as well as looking at new ways to enhance and speed up deposit and lockbox services. Depending on the postal service’s consolidation plans, the bank could look at partnership opportunities at post office locations, where the bank could process checks and immediately capture electronic images of these payments.

A partnership with the U.S. Postal Service could help “create revenue streams that benefit both parties,” Simpson said.