Merchant Integration Proposal: FedEx

Proposal to integrate Coinbase payment systems into the Global Courier Servicer, FedEx.

Joe Buttram

Proposal
As of today, one of the main problems that I see with the Bitcoin adoption process is the immediate liquidation of Bitcoin sales by current merchants. The immediate conversion into traditional cash is limiting Bitcoin by removing value from the ecosystem and makes Bitcoin more of a payment method as opposed to a currency. One of the possible solutions would be to target B2B corporations to encourage the reuse of Bitcoin after a sale is made. The corporation that I am particularly interested in, and will talk about in this proposal, is the Global Courier Service, FedEx. Almost all businesses must use a shipping courier to some degree. Weather it is to deliver their product or receive raw materials, we live in a physical world that still requires this service. And FedEx not only caters to small and large businesses, but also the average individual. Which I believe would give FedEx incentive to use Bitcoin due to its large and diverse customer base.

Joe Buttram

FedEx
FedEx has traditionally had low Net Profit Margins due to the nature of its business model and competition. With variable fuel costs, high fixed costs, logistical challenges, seasonal fluctuations, government-subsidized competition (USPS), amongst other issues, they aim to keep prices low and compensate with high volume. Much like Overstock.com, they are constantly looking to streamline their business model to improve profits and pass savings along to customers. Here is an excerpt from their 2013 annual report: Five pillars to increasing profitability(1) Make Staff functions more efficientstreamlining support functions, and eliminating redundant systems and processes.1 They also chose to highlight the following statistics: The largest driving force in the global economy is e-commerce, which is projected to reach $1 trillion in sales by 2016. The Internet shopping boom is translating into significant growth at FedEx, and its easy to see why. Our specialized e-commerce services and tools are helping transform the U.S. retail industry, where online sales are growing more than three times faster than offline sales. Two notable changes are powering this trend, according to Forrester Research: Mobile devices, such as smartphones and tablets, make it easier for shoppers to access the web on the go (accounting for 11 percent of online transactions, says comScore). And rather than risk losing sales to competitors, traditional retailers are heavily investing in their web divisions. 2 1 Trillion Projected global e-commerce sales by 2016, representing 1 percent of global GDP. 3 42% Projected Increase in US online spending by 2017, from $262 billion in 2013 to $371 billion in 2017.4 1 out of 10, Amount of US retail dollars projected to be spent shopping online by 2017. 5 With a net profit margin of 3.25% for the 2013 fiscal year, any significant change to their business model would greatly affect their bottom line. Much like Overstock.com, whom had a 2% profit margin upon the implementation of Bitcoin, FedEx can reduce a significant amount on their operational costs by eliminating payment processors. This may also appear lucrative to them due to much of their current sales coming from e-commerce and their interest in further pursuing the space.

Page 2, FedEx 2013 annual report. Outlines goals for corporation for increasing profit margins. Page 3, FedEx 2013 annual report. 3 4 5Page 5, FedEx 2013 annual report, sourced from Forrester Research
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Joe Buttram

Payment Processing
The immediate draw for FedEx would be the savings they can accrue by eliminating 3rd party payment processing fees. We can estimate that the payment processing surcharges for FedEx are in the neighborhood of around 1-2%, similar to other large merchants.6 And for calculations sake we can list Bitcoin processing at .01%, which we can point out that among successful Bitcoin sales, FedEx can free up their revenues by almost 100% of their current processing fees. While this is obvious to people aware of Bitcoin, the other selling point we can highlight is Coinbases Instant Exchange policy that eliminates FedExs exchange risk. Again, this is not new to anyone at Coinbase, but this feature provides a unique opportunity for FedEx.

Exchange Rate Risk

FedEx operates in a very delicate business environment. One of the things they addressed in their Annual Report was the effect of Currency Exchange Risk. Changes in foreign currency exchange rates, especially in the Chinese Yuan, Euro, Brazilian real, Canadian Dollar and the British Pound, which can affect our sales levels and foreign currency sales prices.7 While we are a global provider of transportation, e-commerce and business services, the substantial majority of our transactions are denominated in U.S. dollars. The principal foreign currency exchange rate risks to which we are exposed are in the Chinese Yuan, Euro, Brazilian Real, Canadian Dollar and the British pound. Historically, our exposure to foreign currency fluctuations is more significant with respect to our revenues than our expenses, as a significant portion of our expenses are denominated in U.S. dollars, such as aircraft and fuel expenses. During 2013 and 2012, foreign currency fluctuations had a slightly positive impact on operating income. However, favorable foreign currency fluctuations also may have had an offsetting impact on the price we obtained or the demand for our services, which is not quantifiable. At May 31, 2013, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which our transactions are denominated would result in a decrease in operating income of $132 million for 2014. This theoretical calculation required under SEC guidelines assumes that each exchange rate would change in the same direction relative to the U.S. dollar, which is not consistent with our actual experience in foreign currency transactions. In addition to the direct effects of changes in exchange rates, fluctuations in exchange rates also affect the volume of sales or the foreign currency sales price as competitors services become more or less attractive. The sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.8

http://blog.coinbase.com/post/72787431702/coinbase-and-overstock-com-announce-largest-bitcoin Page 36, 2013 FedEx annual report 8 Page 32, 2013 FedEx annual report
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Joe Buttram

During the 2013 Fiscal year, FedEx had actually benefited from exchange rate fluctuations on cash, adding $5 million USD to their balance sheet, but during 2012 had lost $27 million USD. 9 FedEx can hedge this risk by implementing Bitcoin and Coinbases Instant Exchange Policy. While the Instant Exchange Policy costs 1%, it will still significantly reduce their payment processing costs by close to 100%, assuming that they have a 2% surcharge.

Integration
FedEx also has a history of aggressive acquisitions and capital-intensive infrastructure changes. One of the features we can push is the capital passive nature of Bitcoin and its implementation. Our businesses are capital intensive, and we must make capital decisions based upon projected volume levels.10 Not only can we implement Coinbases Bitcoin Merchant tools at low cost, but it can also be done relatively quickly. As in the case of Overstock.com, it was completed in only 9 days. This would be appealing to FedEx considering most of their other investments are capital-intensive and often require long time frames to break-even. With Bitcoin they can immediately see results at low cost.

Bitcoin Community
As we know, the Bitcoin community is very passionate, and very eager to use Bitcoin regularly. This can be another selling point for FedEx. While the community is still small, and the revenues may be insignificant in the short run, FedEx will become the main shipping service for the community. And when coupled with Coinbases Exchange rate guarantee, they can benefit from early adopters who have plenty of Bitcoin to spend, as well as other corporations that currently use and accept Bitcoin. Particularly the businesses that are looking to save on USD conversion fees, going back to my main point, and will instead use their Bitcoins for other business functions.

FedEx ROI
In most B2B transactions, deals are usually closed if you can convince the potential customer that your product will help their bottom line. If I had better data I could put together a ballpark figure for FedExs ROI. What I do know is that BitPay charges $3,000 for their most expensive integration package. I would imagine Coinbase would have comparable pricing and with all things considered, and limited data, I would believe that this would cost no more than $100,000 to integrate Bitcoin into their pay system. And that is probably a very high estimate.

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Page 42, 2013 FedEx annual report Page 34, 2013 FedEx annual report

Joe Buttram

Once that is determined we can calculate how much they can save on every transaction. They will have to meet us half way with the timeframe and volume, but I also think that Overstock.com can be used as a good comparison.

Contact
FedEx is split up into multiple subsidiaries, all performing different business functions. The one most relevant for Bitcoin integration is the FedEx TechConnect segment. This subsidiary focuses upon customer service, tech support, (and what I am interested in) billings and collections. I would set up a meeting with important people in this division ultimately leading to a meeting and agreement with FedEx executives. Here are the two executives who are most vital: Cary C. Pappas
President and Chief Executive Officer FedEx TechConnect ccpappas@fedex.com 901.434.5665 http://about.van.fedex.com/executive_bios/cary_c_pappas

Alan B. Graf
FedEx Corporation Executive Vice President, Chief Financial Office http://about.van.fedex.com/executive_bios/alan_b_graf

The FedEx TechConnect offices can also be contacted directly.

http://www.fedex.com/us/techconnect/

Conclusion
This is a simple and quick write up of the proposed integration. The data and references used are mainly derived from the 2013 FedEx Annual Report, as well as other available information found in a quick Google search. If professional and more sophisticated data were available, a more compelling argument could be made. If I were to work for Coinbase, I would heavily leverage this type of data and analysis to get large corporations to adopt Bitcoin.