Post Office Testing Bank Linkage

The U.S. Postal Service has begun a pilot program that could result in millions of dollars in additional check-processing fees for the banking industry.

Starting on a trial basis in November, the Postal Service will open a $2.6 billion controlled-disbursement account at an unnamed commercial bank. The account will be used to issue checks to vendors of mailing equipment and services.

The funds for such payments presently reside in an account with the Treasury Department.

If the trial program succeeds, all the Postal Service's checking accounts - whose activity exceeds $25 billion a year - could be distributed among five to 20 U.S. banks at the end of next year's first quarter. Most of the checks are payroll payments to Postal Service employees.

Significant Fees Likely

At a typical processing charge of 10 cents per check, that business represents at least $2 million dollars in annual gross revenue, experts said.

Officials at the Postal Service declined to specify which institutions might be considered for such a program. But its treasurer, Stephen M. Kearney, observed that a job of this size "would obviously require that we use some of the biggest banks in the country."

The Postal Service already does some limited business with more than 8,000 financial institutions across the United States, but funding checks through commercial banks would represent a radical change.

Currently, the Department of the Treasury requires that all checks written by the Postal Service to be funded on the day of issuance. With disbursement accounts controlled by commercial banks, such checks would go three to five days without being backed by funds.

Gaining from the Float

The Postal Service estimates it can gain up to $25 million a year in interest income by taking advantage of this float.

"We realize that we are a government agency, but we are also a business, and we want to operate as such," said the Postal Service's Mr. Kearney. "The float is something that nearly every business profits from; we want to do the same."

The Postal Service is required by law to operate at break-even levels, but it has experienced significant losses over the past few years. Officials at the service believe such a program could help remedy some financial ills and help to keep postage rates down.

The recommendation to move the disbursement accounts to commercial banks originated with Lazard Freres & Co. The Postal Service retained the New York-based consulting firm late last year.

Praise from Treasury

The Department of the Treasury, which gave permission for the pilot program in a congressional hearing last month, applauded the Postal Service's efforts to pursue more businesslike financial activities. But whether disbursing funds through commercial banks will bring financial benefits is unclear, the department said.

The unnamed bank participating in the pilot program will maintain a zero-balance checking account for the Postal Service's data center in San Mateo, Calif. This facility generates 600,000 checks annually.

If the pilot is a success, the evidence will be used to make a case for moving all the Postal Service's checking operations to commercial banks.

"Bankers would of course welcome the increase in business," said Edward Alwood, an assistant public relations manager at the American Bankers Association. "But if a government agency is going to park a large sum with a commercial bank, we've got to see what strings are attached before we start celebrating."

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