Discover Scores a Volume Coup with GE/Wal-Mart Network Deal

Discover Financial Services Inc.'s deal with GE Consumer Finance Inc. and Wal-Mart Stores Inc. will lead to a huge volume boost for Discover and help the Riverwoods, Ill.-based company offer pricing to potential issuing partners that exceeds the interchange income they can get from Visa and MasterCard, an expert observer says. The arrangement, under which GE will issue a card branded with Wal-Mart and Discover on the Discover network, also establishes the Discover network–as distinct from Discover as a card issuer–as a major player in electronic transaction processing and an attractive alternative to financial institutions looking for networks beyond Visa and MasterCard, says James D. Higgins, an industry consultant, former Discover executive, and managing director of Jim Higgins & Associates Inc., Hoffman Estatees, Ill. “Discover can now dance with the elephants,” he says. “It proves the legitimacy of Discover as alternative rails to the card associations.” The agreement with Wal-Mart and GE, Discover's first network deal since the U.S. Supreme Court last October upheld earlier court rulings that cleared the way for Visa and MasterCard member banks to issue cards on the Discover and American Express networks, should increase Discover's appeal to other potential issuing partners, Higgins says. Both Discover and AmEx have said for months they are seeking out such deals with banks. Wal-Mart, the world's largest retailer, already accounts for about 10% of the card company's dollar volume, amounting to more than 1 billion transactions annually, so the company can expect to garner a substantial volume boost, Higgins argues. “The deal will mean even more [transaction] volume,” he says. The resulting economies of scale from the deal, coupled with lower overhead costs at Discover, will help the company offer an enticing share of transaction revenue to potential partners, in many cases bettering the interchange banks get from bank card transactions, Higgins says. “Pricing is going to be a better value for mid-sized and large issuers,” he says, referring to the typical size of financial institution the company is targeting. What could hurt Discover as it seeks further network deals, Higgins says, is its lack of international capability. Its network currently supports the Discover card only in North America, in contrast to American Express Co., which like the bank card companies operates a worldwide network. “For some large financial institutions that's a showstopper,” he notes. Discover's agreement with GE and Wal-Mart follows similar arrangements AmEx has made with MBNA Corp. and Citigroup, the latter of which was struck just after the Supreme Court decision. “This [deal] will be a good thing for Discover and for Wal-Mart,” Gary Crittenden, chief financial officer at AmEx, said today during a conference call with analysts to discuss the company's fourth-quarter and year-end 2004 results. The new cards, which will be accepted at all locations that take Discover, are expected to be in circulation by March. Incentives to cardholders will include Discover's cash back offer of up to 1% on all transactions. GE Consumer Finance, a unit of General Electric Co., issues more than 100 million cards for hundreds of retailer clients. It has issued a private-label card for Wal-Mart for years, and is expected to talk to its other clients about issuing on the Discover network. Discover, which this month closed on its acquisition of the Houston-based Pulse EFT Association, a major ATM and PIN debit point-of-sale network, has 4 million merchant and cash-access locations.