USPS agrees $670m mailing deal with Discover credit card firm

The US Postal Service is moving ahead with a new kind of contract with major mailer Discover Financial Services, that aims to counter declining First Class Mail volumes. Credit card company DFS has large, but declining billing and statement volumes, but under the new $670m deal, a big push in its advertising mail is expected to counteract that drop in its use of the “highly profitable” First Class Mail service.

The three-year Negotiated Service Agreement (NSA), which was cleared with regulators last month since it involves pricing for some of the USPS monopoly services, offers DFS incentives to help “slow the erosion” in its First Class Mail volumes.

The contract is dubbed as the “first of its kind” by the US Postal Service, and also sees Discover pledging to sustain agreed levels of mail volumes going forward.

Required to use the USPS full-service Intelligent Mail barcoding system, DFS will receive incentives for exceeding its postal volume commitment, but penalties if its mail volumes are not high enough.

USPS is promising rebates to protect DFS from future increases in postal rates if a certain dollar threshold is achieved by DFS.

Also, rebates are designed so that growth in Standard Mail would compensate for some of the expected First Class Mail decline.

Paul Vogel, president and chief marketing/sales officer at USPS, said the NSA would benefit both DFS and the US Postal Service.

He said: “It is important in its approach as the first multi-class agreement that is designed to add new vitality to billing and statement mail.”

Volumes

Discover Financial Services preferred not to comment on the contract with USPS or its declining billings statement volumes, but credit card companies in the US have been seeing their customers increasingly opting to pay and manage their bills online, leading to a reduction in volumes of paper statements being sent out in the mail.

According to papers filed with the Postal Regulatory Commission, DFS mailed an average of $222m worth of First Class and Standard Class Mail over the past three years. This included around 220m First Class and 600m Standard Class pieces a year.

The Postal Service is predicting that the total amount of DFS’ First Class Mail will decline 5% per year during the course of the year, but that the company’s Standard Mail postage would increase by between 7% to 11% per year.

While DFS’ First Class volumes are predicted to drop to around 164m pieces by the third year of the contract, Standard Mail would rise to more than 760m pieces.

Predicted revenues from the new contract would rise from $216m in the first year of the deal, to $225m, then $232m in the final year.

Taking rebates into account, the USPS could make around $5m a year in extra contributions from DFS according to the Postal Service filings.

The DFS contract is part of an overall effort by the USPS to stem the losses from its reducing First Class Mail volumes, which are dropping by about 5% each year. First Class Mail brings in much of the federally-owned organisation’s revenue, but current growth in Standard Mail is not bringing enough extra revenue to make up for the sinking First Class volumes.

The USPS is currently predicted to make a $6.4bn loss in its overall financial performance this year.