Geographic Shifts in Payment Mail

Today, Aug 2005 by Majors, Leon

Implications for Billers and Payment Processors

Billers and payment processors make the strategic decision of where to locate their operations based on a number of factors. Some of the most important factors relate to the availability and cost of labor as well as the regional concentration of customers. Cost of real estate, proximity to existing sites and disaster recovery issues all rank as top considerations. However, not many billers or processors place the postal service high on their lists of geographic considerations.

Factors such as mail delivery standards to a region and the processing capacity of the local postal facility have a direct impact on mail and check float. Another consideration that should gain more attention is the geographic concentration of remittance mail ("Geographic concentration" indicates the U.S. cities to which the bulk of payment mail is delivered.)

A recent U.S. Postal Service study conducted by ESP Consulting, entitled "Geographic Concentration of Remittance Mail," sheds light on the top 36 cities that receive 5 million or more pieces of remittance mail per month. The 2004 study offers a geographic focus for improvement efforts around the postal service's remittance mail service.

That study surveyed 771 major remittance processing managers whose companies generate approximately 58% of all U.S. remittance mail. The results have brought to light a number of facts that billers and payment processors should note:

Remittance mail is highly concentrated in 36 cities:

In 2004, 36 cities received monthly volumes greater than 5 million items. These cities accounted for approximately 78% of the national payment mail volume. Similarly, the ten cities receiving the largest volumes of remittance mail (each with between 16 - 43 million pieces per month) accounted for 42% of the total volume.

Some of the reasons these cities have become major hubs relate to population density, labor markets and transportation networks designed to move checks to meet bank and Federal Reserve processing schedules. Most organizations no longer question the feasibility of these cities as potential processing locations because they have become large lockbox cities that naturally attract volume.

Billers and payment processors can expect to see more activity from the postal service in these top 36 cities, as they represent a significant portion of payment mail volume. Postal resources are typically concentrated where high mail-volume has existed for many years. Those cities with the highest volume will have greater capacity and efficiencies for processing remittance mail. Just as in the case of payment processing, economies of scale are a key for the postal service.

All postal sites are not created equal. Effective planning for new site locations must involve working with the postal service to consider the capacity of the local facility. While a location may make sense for other reasons, limited capacity in a postal facility may limit the speed of mail transported through a smaller location.

Total remittance mail volume grew significantly between 1997 and 2004:

Although it seems counter-intuitive with today's emphasis on electronic payments, the volume of total remittance mail grew by 14% from 13.1 billion in 1997 to 14.9 billion in 2004. The increase is in the total annual mailed payments from households and businesses to their respective billers. In terms of absolute numbers, this volume increase is 1.8 billion items per year.

For billers and payment processors, this means that checks will not go away for the foreseeable future. In an era of significant increase in electronification, paper has held its own and billers will need to maintain both a paper and electronic processing operation for some time.

Volume growth is driven by the absolute increase in the number of households and the number of bills per household:

The source of payment volume growth lies primarily in the household segment, which experienced a 37% increase from 8.3 billion (1997) to 11.4 billion (2004) pieces annually. During the 1997 to 2004 time period, the number of households grew as well as the number of bills paid per household. The combined volume drove payment volumes up at a higher rate than the rate of electronic payment adoption (e.g. Internet payments, ACH debits, and credit card payments).

Conversely, business-to-business mailed payments declined by 25% down to 3.6 billion pieces annually (1997) from 4.8 billion pieces annually (2004). While larger businesses are highly automated, thereby reducing the number of mail payments, this reduction in mail payments is offset by the fact that small businesses, which are far greater in number, are only slowly adopting electronic payment methods.

Household growth will continue to be constant and sizeable. Population shifts will also be an ongoing factor billers and payment processors will have to deal with. With shifting demographics, billers will continue to have a revolving door of customers moving on and off line. The increased number of bills per household will have a direct affect on specific industries. Industries such as communications are expected to continue offering services that create and expand billing/payment issues. (For the processor, there will be more payments in the payment stream for at least the short term). Whether there is a consolidation of these bills in the medium term remains to be seen.