Feeling the Byte

few years from now-five, maybe 10-Americans will not only buy books, clothes, cars and just about anything else via the Internet, but also will pay telephone, utility, mortgage and other bills electronically. They'll even receive bank statements and Social Security checks over the Internet. In the process, they and the companies and government agencies serving them will save billions of dollars in postage costs.

If projections hold true, by 2005, the telecommunications industry alone will save $23 billion on billing and customer-care costs by shifting from paper billing and telephone-oriented customer service to Web-based and e-mail services, according to research by Killen & Associates, a Palo Alto, Calif., consulting company specializing in electronic billing and payment. The federal government, too, stands to reap considerable savings when documents such as benefit checks and tax forms routinely are transmitted and received online rather than through the U.S. mail.

At present, very little government-to-citizen communication occurs electronically, and only about 1 percent of private-sector bills, payments and statements are sent via the Internet. But it's only a matter of time before that changes, experts say. U.S. Postal Service officials, who oversee the delivery of 3.4 billion pieces of mail each week, fear such changes could cripple their agency. Indeed, Postmaster General William Henderson told a House subcommittee in October that "well-funded and highly motivated forces in the banking, telecommunications and computer industries are building e-payment networks. . . . The result could be erosion of our total revenues. We believe nearly $17 billion [per year] is at risk."

That represents nearly a third of the agency's $63 billion annual revenue-a large chunk of change for any agency, but especially one that is self-funded, as USPS has been since 1970. It's a looming problem that Rep. John McHugh, R-N.Y., chairman of the postal subcommittee, is watching closely. Unless that revenue can be somehow replaced, in the future Americans may see their local mail carrier fewer days each week, have fewer post offices, pay higher postage costs and contribute part of their taxes once again to subsidize postal operations. "Unless the Postal Service can adapt to a rapidly changing communications environment of growing competition," McHugh says, "we are facing a major crisis in the postal sector."

E-mergency

At the October hearing before McHugh's subcommittee, Bernard Ungar, director of government business operations issues for the General Accounting Office, outlined the problem. Citing Postal Service projections, Ungar noted that First Class mail is expected to grow at an annual rate of 1.8 percent from 1999 to 2002. But at that point, postal officials anticipate electronic communications will begin to cause drops of 2.5 percent yearly from 2003 to 2008. "Such a decline would be unprecedented in the service's history and would likely create financial and performance challenges," Ungar said. As bulk-mail advertisers move their business to the Internet, postal officials anticipate additional drops in revenue.

These declines are especially troubling to an agency that has just completed its fifth consecutive profitable year, after losses almost every year since its 1971 reorganization. In fiscal years 1995 through 1997, the Postal Service actually posted annual surpluses of more than a billion dollars. The money has been used to pay down debt accrued earlier.

Henderson isn't about to let the recent positive trend reverse without a fight. He's on a crusade to make USPS a key player in the e-commerce market-as shipper, electronic mail provider and guarantor of electronic communication privacy, all of which he considers natural extensions of traditional mail service.

"E-commerce is a passion of mine," Henderson said at the September 1999 National Postal Forum in Chicago. To him, e-commerce is both the biggest threat to his agency and its best hope for future success.

New Priority

In the early 1990s, under former Postmaster General Marvin Runyon, the Postal Service established a corporate goal of launching and growing new lines of business to make up for anticipated declines in revenue. Its projects have ranged from selling merchandise such as T-shirts and coffee mugs with stamp logos to providing a payment processing service, through a contractor, for American Express Co. Contractor REMITCO Management Corp. collected bill payments, processed and deposited checks, and transmitted remittance records to American Express.

Few of the projects have been profitable. In fact, a GAO review of new postal products published in November 1998 (GGD-99-15) found that only four of 19 new products available at the time had revenues greater than expenses during the first three quarters of fiscal 1998. The REMITCO service cost $8.6 million during that period, for example, but drew in only $2.3 million. Later, the service was dropped, and other projects either were scaled back or discontinued. In addition to financial pressures, the agency also faced considerable opposition to the non-postal projects from companies that argued USPS had no right to compete in areas unrelated to delivering the mail.

Though they've cut back on some business efforts, postal officials are far from giving up on developing e-commerce products. Soon after Henderson took the helm of the Postal Service in 1998, he created a new position of chief technology officer. Since then, he's also created vice president posts for such Internet-oriented services as
e-commerce and e-pay- ments. His goal is to explore and implement technological advancements to help the agency be more efficient and more competitive in the emerging electronic markets. In the process, he wants to make it as
easy as possible for customers to access postal products.

The Postal Service's most successful entry into the e-commerce world involves using its Priority Mail shipping and delivery service, which is designed primarily for First Class mail weighing more than 13 ounces, to facilitate online shopping. As purchases from Web businesses have grown, so have Priority Mail revenues-from $2.7 billion in fiscal 1994 to more than $4 billion in fiscal 1998. Robert Cohen, director of rates, analysis and planning for the Postal Rate Commission, calls Priority Mail the agency's "greatest single product success since reorganization." The commission oversees changes in postal rates, fees and mail classifications.

The Postal Service is required to deliver to every address in America every day, something other delivery companies don't have to do. USPS has been able to capitalize on its huge delivery infrastructure to charge less than competitors, such as United Parcel Service and Federal Express, for many deliveries. As a result, the Postal Service has captured a significant share of the e-commerce business-to-resident shipping market. A January 1999 study by Zona Research, a Redwood City, Calif., consulting company, found that the Postal Service delivered 32 percent of online purchases during the 1998 holiday mailing period. Aggressive marketing of Priority Mail, including such ventures as a recent joint advertising campaign with online bookseller Amazon.com, is helping to further boost business.

Postal officials are hoping to solidify and even expand their place in the e-commerce shipping realm by mastering the process of returning unwanted merchandise. About 25 percent of Internet purchases are returned, says Bob Krause, vice president of e-commerce for the Postal Service. In October, the Postal Service launched Returns@Ease, a series of services designed to simplify the return process. Sellers participating in Returns@Ease can allow purchasers to go to their Web sites if they want to return products and print out everything from Priority Mail return mailing labels to the actual postage necessary. Then they can leave the package at their home mailbox or any U.S. mailbox, rather than having to go to the post office to have the package weighed. "Since we're walking past that house every day, it makes sense that we'll be able to offer more opportunities" to return purchases more easily, says Kim Parks, manager of marketing and strategy for the Postal Service's expedited package service.

Postal officials have discussed the possibility of expanding the returns service. For example, if a retailer did not want to receive a product back-perhaps because the item was not selling well-the Postal Service might reroute the package to an online auctioneer who could sell the item, then send the proceeds to the retailer, Krause says.

Another postal e-commerce product is PC Postage, started last August. The service allows customers to buy stamps electronically and store them in electronic vaults attached to their computers. Users can choose any class of mail-First Class, Priority Mail, Parcel Post, etc.-and have the postage printed onto an envelope or label. Each time they send a letter or package, the amount of postage used is deducted from the vault. So far, two companies, E-Stamp and Stamps.Com, have been certified to offer the product. Users apply through these companies for Postal Service digital certificates confirming the user is who he or she claims to be. More than 300,000 certificates had been issued by the end of 1999.

A Matter of Trust

Priority Mail and electronic postage are helping to make the Postal Service a player in the e-business world. But Henderson and his team have grander goals. They want USPS to be the primary player in ensuring secure electronic message transmissions. "We don't believe it's about technology," says Krause, noting that many companies have the technology to enable private messaging. "We believe it's about trust. The consumers need to be able to rely on a trusted third party. That's us."

When a person puts a stamp on an envelope and drops it into a mailbox, he assumes that correspondence will arrive unopened and be delivered to the person to whom it is addressed, he says. At present, there is no such assurance for e-mail, Krause says.

Providing that security guarantee ultimately will be what turns the current 1 percent of people paying bills electronically into a majority, postal officials say. Their aim is to provide an electronic postmark that can be wrapped around e-mail or other electronic messages. The postmark would note the date and time sent and received, authenticate the identities of senders and receivers, and guarantee that the message had not been tampered with. In a related service, the agency also plans to offer secure electronic mailboxes that essentially will be confidential individual Web sites, where customers can view and pay bills and read other sensitive personal documents such as health records.

Why should the Postal Service play this role? For one, because it's a neutral government agency, says Stephen Kearney, the USPS vice president who oversees e-payments. Second, the Postal Service's 225-year-long history has established the agency as a trusted brand. In addition, USPS has a mandate to provide universal service, and, assuming the courts extend existing First Class mail authority to the electronic realm, they have the force of the Postal Inspection Service to investigate fraud and U.S. attorneys to prosecute it. Private entities can't offer that extra assurance, Kearney says. "We want to create a system that binds the country together and facilitates commerce. We are a unique third party" that can do that, he says.

USPS is now testing the concept on a pilot basis with PosteCS, an international, Internet-based service operated jointly with Canada Post and France's La Poste. The service guarantees confidentiality for electronic transmissions through an electronic postmark, tracking and tracing, proof of delivery, and sender and receiver authentification. Another pilot project with the Treasury Department is using an electronic postmark to guarantee the security of electronic payments of government vendors, Kearney says.

Since the need for revenue is driving these new services, customers will pay a price for them. Exactly how the pricing will be structured will depend on customer wishes, Kearney says. There may be a charge per message or a monthly flat fee. Or basic non-secure e-mail may be provided for free, with an extra charge added for any postmark, he says.

Critics' Complaints

There are, of course, critics of the Postal Service's e-commerce endeavors. Some competitors insist the concerns about First Class mail declines are overblown. The Main Street Coalition for Postal Fairness, a group consisting of the Newspaper Association of America, the Greeting Card Association, the American Bankers Association and others, sent a letter to Congress in November blasting the Postal Service's numbers. The $17 billion loss projection doesn't reflect the fact that when revenue drops, so do costs, the group noted. "In addition, there is no recognition of increased Postal Service volume and revenue from Priority Mail and Parcel Post resulting directly from e-commerce." The group also noted that there was similar concern in the 1980s that widespread use of faxes and lower telephone costs would cut into First Class revenues, but letter volume actually grew.

"It's really speculation," agrees the Postal Rate Commission's Cohen. "We're in an area that nobody knows anything about. The future is uncertain." Postal officials concede there's no way of knowing for sure exactly when First Class mail will drop off. But they insist that significant declines are inevitable in the long term. They want to position themselves to survive and even thrive, regardless of when that happens.

Competitors-especially delivery companies-also complain that the Postal Service has an unfair competitive advantage over private companies. Because of its government status, the agency doesn't have to pay taxes or even parking tickets, they note. True, Krause says, but the few million dollars those advantages save the agency each year are more than offset by the billions of dollars it spends to provide universal mail service, something not demanded of delivery companies.

McHugh has been leading an effort to level the competitive playing field between the Postal Service and private companies with his Postal Reorganization Act, which passed his subcommittee in April 1999. His bill would create a for-profit U.S. Postal Service Corporation, through which all competitive services and products would have to be sold. The corporation would be subject to the same rules as private companies. In addition, the agency would be granted more flexibility to set its rates, which now are largely controlled by the Postal Rate Commission. Strong opposition to various specifics in the bill likely will prevent its passage, observers say. But all sides agree some reforms are needed, suggesting that the debate will continue.

Proper Role?

Regarding electronic messaging, skeptics insist that private companies already are providing efficient and secure services, negating a need for Postal Service involvement. Many consumers feel comfortable buying merchandise with a credit card via the Internet and soon will adapt to electronic bill paying, they say. And companies such as Yahoo.com already provide well-encrypted electronic bill-paying services. "I can't see the Postal Service doing this faster or cheaper," says one agency observer, adding, "If the need goes away, then the institution should go away." Indeed, these arguments have triggered a public policy debate about "whether the service should be limited to offering traditional postal services and wind down its operations as its core business declines," the GAO's Ungar told Congress in October.

Kearney, however, insists people are seeking a trusted third party to stand behind electronic communications. If the public is so comfortable with the idea of conducting business online, he asks, then why do only about 1 percent of bills get processed electronically? In his view, many Internet users still draw a line between purchasing a book online and sending or receiving sensitive financial or medical documents. Once they have a government-guaranteed security backing those transmissions, he believes, they'll be more likely to use and benefit from the services. "We feel we have an obligation to give it a shot," Kearney says. "The marketplace will decide if it wants or needs us in that role."