PRC Backs Discover NSA

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The Postal Rate Commission approved the U.S. Postal Service's proposal for a three-year negotiated service agreement with Discover Financial Services Inc., Redwoods, IL, a business unit of Morgan Stanley.


Approval came in a recommended decision issued Sept. 30. NSAs are special service and rate arrangements negotiated between the USPS and a mailer or group of mailers. Proponents say NSAs will encourage greater volume by rewarding the postal service's major customers with discounts and premium services. Capital One Services received the first NSA last year.


The USPS filed two NSA cases with the PRC in June seeking three-year tests, one with Discover Financial and the other with Bank One Corp.


The Discover case was decided first because the Bank One case was more complicated as a result of its July merger with JPMorgan Chase. The merger "raised a whole bunch of different questions about volumes and about the return experience of JPMorgan Chase mail, which wasn't in the initial proposal," said Steve Scharfman, PRC general counsel. The PRC has no date for when it will announce a decision on this case.


As with other PRC decisions, approval is needed from the USPS Board of Governors, which would choose an implementation date.


Discover's NSA is based on the same two functional elements that are central to the Capital One NSA: address correction and a declining block rate volume discount.


Discover would be eligible for discounts of 2.5 cents to 4.5 cents per piece if its annual First-Class bulk volume exceeds 405 million pieces. The discounts rise with volume, and they are in addition to reductions given for automated First-Class letters that are presorted by ZIP code and carrier route.


The USPS would not return undeliverable First-Class mail solicitations. Instead, Discover would receive electronic address corrections. Discover also would have to update any databases maintained for solicitation mail.


The PRC's decision states that the USPS will realize a $7 million benefit during the NSA's term. This is based on estimates of $8.1 million in savings from the address-correction feature, $2.1 million in increased contribution from higher First-Class volume and a net leakage of $3.2 million from the discount feature. The agreement establishes a negotiated $13 million discount cap over the life of the deal that also provides an annual adjustment mechanism to the volume threshold.


During the three-year test, the USPS will pursue a data collection plan similar to the one recommended for the Capital One NSA. Information from both data collection plans should prove useful for evaluating the benefits of pursuing this type of agreement with other mailers, the PRC said.


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