Postal Woes Spell Opportunity for Online Banking and Bill Pay

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Impending service slowdowns at the post office could provide a boost to bankers.

The U.S. Postal Service has announced a number of proposed steps to slash costs in recent months, after losing $5 billion last fiscal year. The agency is projecting greater losses going forward, as mail volumes continue to decline.

"We're talking inevitably about a significant and universal disruption of one of the most entrenched networks in this country, affecting every single household," says Eric Leiserson, a senior research analyst at Fiserv Inc. "Disruption means bills get lost, payments get lost and payments are late." That, says Leiserson, leaves "huge openings for banks to promote online bill pay in tactful ways."

When that disruption will ultimately hit remains uncertain, thanks in part to a recent Congress deal to postpone the closing of post offices and mail processing centers until May 15, 2012.

"The can just keeps getting kicked down the road because it's a politically sensitive issue, especially in an election year," Leiserson says.

The deal with lawmakers comes on the heels of several recent proposals by the Postal Service to examine the possible closure of more than half its 487 mail processing centers and elimination of overnight First Class mail delivery. The agency has also proposed cutting Saturday delivery, as part of efforts to reduce operating costs by $20 billion by 2015.

What spells a retreat by the Postal Service could represent an opportunity for purveyors of online banking and bill payment. That, in turn, will increase the importance of marketing the benefits of online bill payment, says Mark Schwanhausser, a senior analyst at Javelin Strategy & Research.

"What's going on with the post office really creates an opportunity for billers and banks," in part by appealing to consumers' desire to feel "in control" of when their bills are paid, says Schwanhausser.

Paying bills online has been shown to cut processing and customer service costs, analysts say.

For banks and other financial service firms, the shift to online transactions holds a double-barreled opportunity: the prospect of cutting costs and increasing customer loyalty, given the likelihood that those who set up payments through a given institution are likely less inclined than stamp-lickers to move their accounts. More than one-third of consumers said they would be less likely to switch banks as a result of their online bill pay experience in a 2011 Fiserv survey.

"Research from the last 12 years has shown that financial institutions gain a significant amount of value when their customers pay online," says Leiserson.

At the same time, the decline in postal service does not appear to pose a particular threat to financial services firms. David Nelms, chairman and chief executive of Discover Financial Services, said he is not overly concerned about the decline in postal service during a fourth-quarter earnings call earlier this month.

"We are a big customer of the post office. We've been very pleased with their continuing service," said Nelms. "A lot of our business … is moving to the Internet."

The migration to online transactions has also enabled Discover to close two of its three payment processing and statement centers over the past few years, according to Nelms.

"There's a transition going on right now in terms of how financial institutions interact with their customers," says JPMorgan analyst Richard Shane. "Does it impact my investment thesis? No, it doesn't. But it does contribute to my understanding of the mosaic of how these companies work."

It's also not clear that all arenas of consumer banking will be affected equally. Credit card solicitations, for example, which issuers mail in bulk, are not likely to be effected by current proposed changes.

"Almost all (99% of offers) of the industry use Standard Mail rather than First Class," for new credit card offers, Andrew Davidson, a senior vice president at Mintel Comperemedia, said in an email. All told, U.S. households received 1.3 billion offers for new credit cards in the third quarter of 2011, he added.

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