The St. Louis Magazine Editors Room blog called us on Friday to ask about an article they were writing about the Post Office’s financial issues.  The author wondered how it impacts the post office when people pay for a stamp or two with a credit or debit card.

The phone call prompted me to do a little more digging into how much it would cost the Post Office to accept a credit card to pay for a single $0.42 stamp. First, lets look into the interchange rate.  Interchange is the amount that is collected by Visa and Mastercard and is paid to the bank that issued the credit card (for example, Capital One).

While Mastercard and Visa do have a discounted rate structure for small transactions, only certain industries qualify and the Public Sector is not one of them.  Fortunately for the Post Office, Mastercard has a special discounted rate structure for Public Sector entities, which is 1.55% + 0.10 for credit and 0.80% + 0.25 for debit Mastercard.  Visa has a similar program, called CPS/Retail 2 Developing Markets, that costs 1.42% + 0.05 for credit cards and 0.80% + 0.25 for debit cards.

When applied to the purchase of a single stamp, or even of a book of 20 stamps, the interchange rate can amount to a sizable portion of the purchase price, as much as 60.3% when using a debit card to buy a single stamp.

In addition to the interchange rate, the Post Office will be assessed a fee for each transaction by its credit card processor.  For a small business, those fees can be quite substantial, sometimes even more than the interchange fees, effectively doubling the cost of the transaction.  However, for a large government entity such as the post office, the processor’s markup is probably a constant $0.02-0.04 per transaction, adding a small amount to the fees.

Do credit card fees contribute to the financial troubles faced by the Post Office?  Probably a little bit, but we should keep in mind that around 50% of the business conducted by the Post Office is wholesale (catalogs, mass-mailings), most of which are probably not paid for with credit cards.

We know from the USPS’ published financial reports that 50% of the revenue from the post office comes from Standard Mail (all of which are mass mailings).  Let’s assume that 25% of the remaining 50% of revenue is paid for with a credit card.  This is a conservative estimate, based on the First Data / Hitachi Consulting study that shows that credit and debit card payments accounted for 63% of all in-store payments in 2008. Then let’s assume that the credit and debit card payments cost the post office 2.5% on average.

Applied to the roughly $75,000,000,000 of 2008 revenue we get $75,000,000,000 x 50% x 25% x 2.5% = $234,375,000.  An extra $234M wouldn’t have been enough to bring the post office into the black (it lost around $2B in 2008) but it might have helped.

Note that those in the payments industry will point out that taking other kinds of payments - checks, cash, etc. - also have costs.  They are right, but there is an argument to be made that credit cards are more expensive than other forms of payment when they *should* be less expensive since they are more modern and high-tech.