The United States Postal Service, USPS, is a public sector company that operates in a private sector market.  The services it generates are similar to other companies such as Federal Express, UPS, and Mail Boxes Etc. Through the early 1990’s, the USPS accepted only cash and checks as means of payment while its competitors also accepted credit cards.  Society was moving towards a cashless environment under the headings of convenience and value, while businesses wanted increased sales and guaranteed payment. These factors led the USPS to hire Coopers & Lybrand to conduct activity-based cost studies of its revenue collection processes and a market strategy study for a national credit card and debit card program.

  C & L developed separate cost models for the cash, check, credit card, and debit card processes in terms of the activities that link together to make the processes. The activities were broken down into unit activities, batch activities, and product activities.  Examples of unit activities are: accept cash, processing of checks by bank, and process credit card.  Examples of batch activities are: closeout and supervisor review of work, consolidation and deposit of unit’s cash/checks, and reconcile daily credit card receipts.  Examples of product activities are: maintenance charges for bank accounts, reconciling bank accounts, maintaining credit card equipment, and training.  Once the activities were identified, a proper driver was used for each activity.  Examples are: number of transactions, closeouts, deposits, accounts, checks, charge backs, and terminals.

   From the activities and corresponding drivers the projected annual cost was determined for each of the four processes.  This projected cost model was computed for years 1994 through 2000, and it showed a negative net benefit derived through 1997.  However, the projected net benefit from 1998 forward showed that implementing a credit/debit card system would be well worth the investment.  

    Even though this was all good news, approval was not a sure thing.  What was being recommended to the USPS Board of Governors was an aggressive two-year implementation that would have 50,000 terminals in over 33,000 post offices with trained employees and would cost 60 million dollars.  During Michael J. Riley’s (CFO) presentation to the Board on this matter, he made sure to explain the financial benefits that would be derived, but made sure to push the fact that this was a customer service initiative.  Any financial benefits gained would simply be an added bonus.  The USPS Board of Governors unanimously approved the implementation of a credit/debit card program. Implementation started in April of 1995. 

    Pushed as a customer service initiative, the scope of this project was expanded to include phone and mail orders for stamps as well as vending machines for convenience.  The contract was also revised to 67,000 terminals due to demand for the services.

The benefits derived from this project:

·         More than 300 positive news articles on this program.

·         Customers enjoy the convenience and flexibility.

·         USPS retail window clerks feel safer (less cash).

·         More accurate than counting cash, so liability is minimized.

·         USPS gets funds the next day from card transactions at a very
      competitive discount rate.

·         The payment infrastructure created by card acceptance has helped
      the USPS launch new products and market tests more quickly.

·         The USPS is the nation’s largest debit card acceptor due to its delay
      in credit card acceptance.

The uses for Activity Based Costing continues to grow.  Its original purpose was to calculate accurate product costs.  Here, we have seen it used to identify the strategic process improvements that maximize value to customers.

Note by James R. Martin:

The most interesting thing about this article for me was the cost per dollar estimates generated by the ABC system for cash, check, credit card and debit card transactions.

These estimates are interesting because you might think that cash transactions would be the least costly. So why is the cost per transaction lower for check, credit cards and debit cards? One reason is that the size of the transactions are larger even though there may be more handling and other cost involved (e.g., discounts to the credit card companies). The average transactions were $20 for cash, $50 for checks, $52 for credit cards and $49 for debit cards.

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