Discover’s Hybrid Growth Strategy Boosts Network Volumes

Discover Financial Services now has more than 100 bank card merchant acquirers booking small to medium-sized merchants for its network, the company reported today at an investor presentation in New York City. Discover predicts that those acquirers will enable Discover acceptance in 97% of their new merchant sales in 2010's fourth quarter, up from 90% in 2008's second quarter and 77% in the second quarter of 2006, when Discover's third-party acquirer program was just starting. Not all of those merchants will turn on Discover acceptance even though it's available, however. But the percentage is going up. Discover expects 85% of the potential merchants signed by the acquirers to state they accept Discover in the fourth quarter, up from 79% in 2008's second quarter and 77% two years earlier. The number of U.S. merchants technically able to accept Discover is about at parity with the Visa/MasterCard merchant base, according to Diane Offereins, executive vice president of payment services. Offereins said Discover has 7.7 million merchant locations in North America, but didn't get more specific. MasterCard Inc. recently reported that it has 8.2 million acceptance locations in the U.S. and 800,000 in Canada, though the number of merchant contracts would be less. MasterCard's numbers also include ATMs. Under the bank card acquirer program, which had 96 participants a year ago, Riverwoods, Ill.-based Discover sells a portfolio of merchant accounts to a partner acquirer. The partners set pricing, provide Discover customer service, and include Discover transactions in their merchant statements along with Visa/MasterCard activity. Discover maintains direct relationships with about 2,000 of its largest merchants. Offereins said there is still a perception gap in which many merchants believe Discover's reach is smaller than it is. To address that, Discover sales people made 850,000 site visits to merchants last year alone, she said, noting that 1 million non-acceptors have been added since 2007. American Express Co. also uses third-party acquirers to sign smaller merchants, although it retains ownership of the accounts and sets pricing. Discover's network strategy is a hybrid that not only uses acquirers, but also Diners Club International, the Discover-owned Pulse EFT network, and partnerships with foreign payments companies such as Japan's JCB card, China UnionPay, and, in the newest agreement, with South Korea-based BC Card. These agreements enable Discover to let its cardholders use their cards abroad while visitors to the U.S. generate network transaction volumes for Discover if they carry the partner networks' cards. “All members can keep their local identity while having global acceptance,” said Offereins. BC Card is the largest domestic network in South Korea, with 11 member banks that have issued 52 million cards. BC Card has 2.62 million merchants and processed 2 billion transactions in 2008, according to Discover. Discover had virtually no acceptance outside the U.S. except for a few spots in Canada, Mexico and the Caribbean until it struck deals with China UnionPay in 2005 and JCB in 2006. In 2008, Discover bought Citigroup Inc.'s Diners Club International network business. Discover reported Tuesday that Diners Club International had $6.55 billion in charge volume in the company's first fiscal 2010 quarter ended Feb. 28, up 4.1% from $6.29 billion in the year-earlier quarter. This week, Atlanta-based acquirer Global Payments Inc. said it had struck a deal in which it will sign merchants for Diners Club acceptance in markets Global Payments serves, which include the United Kingdom, parts of Western Europe, Hong Kong, India, and Taiwan. Discover cardholders, too, will be able to use their cards at locations Global signs. Discover's expansion strategy also includes ATMs. Cardholders now have access to 675,000 ATMs around the world, and Discover hopes to get that total up to 850,000 by year's end, according to Offereins. Pulse had 719.9 million transactions in the first quarter, up 4.9% from 686.5 million a year earlier. Discover Network transaction volumes rose 3.2% to 381.6 million from 369.6 million. Total dollar volume generated by Pulse, proprietary Discover and Diners Club cards in addition to cards issued by Discover's third-party issuers totaled $58.9 billion, up 2.4% from $57.5 billion in fiscal 2009's first quarter.