Discover Triples Its Acceptance Network with Diners Club Deal

Seemingly trapped in North America after shedding its money-losing British credit card operation in March, Discover Financial Services LLC suddenly is a global payments player with its pending deal to buy Diners Club International from Citigroup Inc.'s Citibank N.A. for $165 million in cash. The deal adds 8 million merchant and ATM locations to Riverwoods, Ill.-based Discover's acceptance network of approximately 4 million locations?most in the U.S., and some in Canada, Mexico, and the Caribbean. Diners Club cardholders spent $30 billion outside North America last year, according to a Discover release. At a conference call with analysts Monday morning, Discover chief executive David Nelms described building up Discover's North American merchant base as “Job 1,” but said adding global acceptance has been a high priority. “It just wasn't particularly achievable up until now at a reasonable cost and in a reasonable time frame,” he said in response to a question. “This changes all that.” The deal pairs the two smallest of the five U.S.-based card networks, but they are near opposites. Founded in 1950, Diners is the oldest general-purpose card network, while 22-year-old Discover is the youngest. Diners has an upscale image and has never strayed far from its travel-and-entertainment roots, while Discover has a blue-collar reputation passed down from its founder, Sears, Roebuck and Co. Both networks face intensifying competition from the far larger Visa Inc., MasterCard Inc., and T&E leader American Express Co. networks. Discover is in the midst of building its so-called third-party payments business by recruiting financial institutions to issue Discover-branded cards and processors to sign merchants to accept Discover network cards. According to Nelms, Diners in the near term will add 30% to Discover's third-party volume and 60% to third-party revenues. After full integration in two to three years, Discover cards will be accepted abroad on the Diners network while foreign-issued Diners Club cards will be accepted in the U.S. on the Discover network. The size of Diner Club's cardholder base wasn't disclosed, but a large number of its cards are commercial cards issued to corporate employees who rack up big bills while traveling. “What Diners offered and still offers is very much a quasi pure play of the T&E sector,” Frank B. Martien, a partner at Linthicum, Md.-based First Annapolis Consulting Inc., tells Digital Transactions News. He adds that Diners and Discover “are certainly stronger together than apart.” Under the terms of the agreement, Discover will acquire the Diners Club International network; its brand and trademarks; its employees; and agreements with 44 licensees who issue Diners Club cards and maintain the network, which has locations in 185 countries. The licensees themselves are not part of the deal. Nelms emphasized that Discover's role will be that of the franchise owner and operator, and that the company doesn't plan to issue cards in international markets. Citi holds a number of the Diners Club licenses, including those for the U.S., Canada, and Australia. In the U.S., Diners Club cards carry the MasterCard logo, giving them wide utility domestically and internationally. That arrangement will continue indefinitely, a Citibank spokesperson tells Digital Transactions News. “North America is not impacted by this transaction at all,” the spokesperson says. In a release, Discover said, “Citi will remain a significant long-term issuer on the Diners Club network as part of the transaction.” Citi bought Diners in 1981 from an insurance company. Citigroup, the parent company, has been struggling recently with subprime mortgages and other issues. In the release, Citi cast the sale as part of an effort to focus on its international card-issuing business. Nelms would not comment in detail when asked by an analyst about how Citi and Discover forged the deal. Diners apparently is profitable; Nelms said it would have added $75 million to Discover's revenues in 2007, and he expects it to produce $10 to $15 million in pre-tax profits during its first several years of Discover ownership and even more later. Nelms said branding issues would be sorted out as Discover integrates its network with Diners Club's. Under Discover's franchise ownership, a Citibank-issued Diners Club card potentially could carry the logos of Citi, MasterCard, Discover, Diners Club and the Discover-owned Pulse EFT network. Discover expects to close on the deal within three months. Discover recently sold its Goldfish card business in the United Kingdom to Barclays Bank PLC for $70 million. The network has signed reciprocal deals with processor China UnionPay and Japan's JCB network to get Discover cards accepted in China and Japan.