Special Report – mailing issues: do not bend
As the postal market slowly opens up, exploitation of loopholes in the Reims agreement is on the increase. Only a truly liberalised market will deter firms from bending – or breaking – the law. David Reed reports.
Direct marketers do not often think about Reims. Except when ordering champagne, that is, when they may prefer Epernay-based Moet et Chandon to Reims-headquartered Louis Roederer.
Yet the Reims agreement drawn up by the Universal Postal Union (UPU) has a significant bearing on direct marketing. The goal for the UPU was to stamp down on ABA remailing – the preparation of direct mail in one country for shipping to a second, only to be remailed back to country of origin.
It may seem an arcane practice. But remail used to allow direct mail campaigns to be sent for a few pence per item, rather than the 17p achievable using postal discounts in the UK. Yet post-Reims, there is a growing threat of loopholes and grey areas being exploited to undermine the benchmark price of domestic postage.
Offshore mailing centres, extra-territorial offices (ETOs) and predatory pricing are all steadily increasing. As the UK market deregulates, the growth in competition will result in entirely new postage options – some legal, others not. The result could be a potential minefield for unwary mailers.
According to Richard Roche, head of business development at Royal Mail, there is little ABA remailing. "However, we do have processes in place to identify these illegal mailings, which are generally easy to spot," he says.
The postage paid impression (PPI) is one giveaway, since it will be a non-Royal Mail version. The recent change in PPI designs proposed by the company was intended to help differentiate between items it carried and those sent through rival services. Every one of the six designs carries the words 'Great Britain'.
Roche warns unwary clients about accepting special offers of low postage prices. "The mail operator will be fully aware that this is an illegal practice. If they're prepared to break the law, then customers should think twice before trusting them with their mailings," he adds.
The issue arises if the service being offered falls within a Postcomm- licensed area. This principally means the delivery of bulk mail to addresses within the UK. Roche says anyone being approached with a special deal should ask to see proof that the company has a proper licence.
The temptation to follow up on such offers grows when budgets are under pressure and prices rising. This was the situation that led to the boom in ABA ten years ago, before the UPU worked out how to stop it.
"There was a company operating against the rules in the late Eighties and early Nineties, getting large mailers to ship to Moscow for remail back to the UK," says Brian Smith, European partner at John Watson Partnership and an acknowledged expert on European postal issues.
"Unscrupulous people were taking advantage of a loophole in the law. But it went out of vogue," he says.
That loophole was the result of something called terminal dues. All countries send items of mail to each other. Destination post offices need to claim their share of the postage revenue for handling these items. But this can not be done for every item. Instead, the five- yearly UPU Congress (which convenes again next year) sets out the expected volume of traffic between each country and the revenue that will pass between them. This is then reconciled by the postal services operators, after a set period.
The loophole emerges when a country has unused capacity for international mail and a low relative terminal due that it pays to the country of destination. Russia had spare capacity within its allowance and the low value of the rouble meant its payments were almost worthless. UK clients could be charged half the UK postage rate to remail items from Moscow and still make a fat profit for the intermediary.
The Reims agreement was not the only way in which this loophole was closed. "The postal operator suffering from ABA can charge a client with a surcharge to cover the differential rate," says David Robottom, director of industry development and postal affairs at the DMA (UK).
This precedent was set by a legal challenge by Deutsche Post in the European Courts of Justice. Citicorp had been using ABA remail to target prospects in Germany. The German postal services operator was not being paid in full for the work it did in receiving the mailings from abroad, sorting and delivering them, because of the terminal dues loophole. The courts said it could pursue the client for the difference.
The principle underpinning this ruling was based on the location of the decision-making unit (DMU). "The DMU has to be shown to be in the country which would be mailed," explains Smith. Since Citicorp was mailing German prospects about services run from its DMU in Germany, it had no defence.
But even if ABA is no longer an option, it does not mean every cheap postage route has been closed. It is possible for a company to get around the DMU issue if it can prove it has an ETO that is the actual principal in the campaign.
Financial services providers have recognised the potential to leverage this option, because many of them have offshore banking centres in the Channel Islands or Caribbean. "You can produce mail in the Channel Islands. It has a deal, via terminal dues, with Royal Mail. The only legal way to produce mail in Jersey or Guernsey and ship it into the UK is if you have a branch office there," says Smith.
According to Jersey Post, 70 per cent of the mailing work it processes is for financial companies. In most cases, this relates to customers of those offshore tax havens that are looking for a better service.
"We are currently piloting a 'thick consolidation' solution for one of our international banking customers," says Simon Le Huray, head of business development at Jersey Post ProMail. Working with Pitney Bowes, it is now printing, inserting and posting statements that are then hosted on websites operated by Jersey Post.
"This means the bank's customer services team can access the information immediately and is able to provide customers with instant information relating to that statement. The plan is to archive these statements for three months so that customer services can print and post copies, should customers request them," he says.
It is easy to see how financial services companies could exploit such opportunities to mail customers of UK-based operations for less. Many of the Channel Island-based banks and investment houses are in any case little more than signs on doors or registered offices that are actually those of the company solicitor.
When it comes to international direct mail, the pricing and regulation is even more complicated. "Many unresolved issues have arisen from the structural changes that have occurred in the way international business mail is being produced for global marketing," says Maria Clayton, account director at Mailcom and eMailcom.
"The costing structure for anything larger than a C5 pack can be prohibitively expensive. Nonsensically, it can sometimes be more expensive to mail certain European countries via a sorted service than it is to go into the Post Office and mail the envelope over the counter," she says.
A creative treatment that is not C5 in format can therefore end up blowing the marketing budget. One alternative is to use a different postal service for international mail.
This creates its own issues. "When the pack arrives with a British look and feel, yet an overstruck indicia and a return address in another country, this negates the creative input and surely impairs both take- up and response times," says Clayton.
Mailing houses have to be careful when working with bulk mailing consolidators. Audit trails can be difficult to create, as these companies constantly look for cheaper postal service providers. This has already led to international mail being sent out of the Third World, and in some cases simply not being distributed at all.
"International mail seems to be in an all-time state of confusion. If there is a situation where in some cases it's cheaper to go to the Post Office and buy a stamp, or to sort it to Europe and rest of the world, if it's being sent via some of the Scandinavian countries, this makes a mockery of the British system," she says.
This confusion could also be spreading to the UK and threatening unfair competition. As deregulation is pursued by Postcomm, overseas postal services operators are taking up licences and looking to build a client base. The question of how they price their services – and where some of those services are performed – is becoming more difficult to answer.
"The liberalisation of the UK market and the increased number of competitors may result in an increase in the number of mailing companies willing to risk breaking the law," warns Roche. "However, the surcharges which are imposed by Royal Mail when it receives one of these mailings should dissuade most operators, and in turn their customers, from contemplating this approach."
Once the market has been fully liberalised, it would no longer be illegal for a company to produce its mailing in Germany, have it collected by Deutsche Post and brought to the UK for injection and delivery, despite having a UK-based DMU. At the moment, any such approach would result in Royal Mail seeking to surcharge the mailer.
Pricing will be a key device in the new market, and is one of the major attractions to bulk mailers. In order to establish their services, competitors to Royal Mail are seeking to set the lowest possible cost base. Whatever level is finally determined by Postcomm or the law courts, this will not prevent these companies from using loss-leader offers.
"Predatory pricing is already happening," claims the DMA's Robottom. And production of direct mail campaigns in the home country of some of those rivals is also occurring, even if it is against the rules.
It is tempting to break out the champagne and celebrate the arrival of competition and lower postage costs. Loopholes, special offers and grey areas mean it is possible to pay less for delivery – provided a subsequent surcharge does not get levied which results in the whole campaign busting its budget.
What is needed is a quicker opening up of the market. As Robottom says: "True competition in the EU and global markets will mean there is no need for ABA or ETOs. They are a short-term fix. These are signs of an incomplete market."
