Discover Chief Nelms Calls for Innovation, Asks for ISO Help

In a determined if not defiant speech delivered today at a conference of independent sales organizations, Discover Financial Services Inc. chief executive David Nelms invited ISOs to help Discover build its network by helping introduce new services and recruiting more merchants. He also decried high merchant acceptance costs and took a veiled swipe at the bank card associations, which Discover sued last October, alleging anti-competitive practices, and seemed to open the door to such technologies as PIN debit for purchases on the Internet. “What you've seen so far from Discover is just the beginning,” he said, pointing to such moves by Discover as the recent acquisition of the Pulse electronic funds transfer network and its announcements that it would process on its network cards cobranded with Wal-Mart Stores Inc. and its Sam's Club warehouse chain. Nelms said Discover enjoyed a record year in 2004, with more than 1 million merchant outlets added to its network. More than half of those merchants, he said, came to Discover through ISOs. He invited ISOs not currently selling Discover to add the brand, and looked to ISOs to help internationalize the network by recruiting merchants in Canada, Mexico, and the Caribbean. “If you're not already selling Discover and Pulse we invite you to join us,” he said in delivering the keynote address to the annual meeting in Las Vegas of the Electronic Transactions Association. He pointed to Pulse and its strength in PIN debit as an instrument by which Discover can build its network by expanding its product offering beyond credit cards into the fast-growing debit market. “We intend to grow our share of the PIN debit market following our acquisition of Pulse,” he said. Conversely, Discover has added stored-value and credit card offerings to Pulse's product lineup, and will add a Discover signature-debit product later this year, he added. Pulse currently processes signature debit for about 200 of its 4,000 member banks. The development of new products, he said, is essential for network survival and growth in today's competitive climate, he said. Since the Supreme Court last October upheld banks' right to issue cards on the Discover and American Express Co. networks, he said, “all the network have moved to add new issuers and new products or to exit the business, as in the case of Diners Club North America.” Diners Club is adding its mark to bank cards issued under the MasteCard brand. Innovation, Nelms said, allows networks to cut merchant acceptance costs, leading to transaction growth.. In a veiled reference to Visa USA and MasterCard International, he said: “By focusing on efficiencies we can drive down costs. Long-term growth will require efficiency and innovation rather than the market-power tactics some networks have used in recent years.” Discover has sued the bank card network, alleging their rules preventing banks from joining non-bank networks prevented Discover from competing in such markets as debit. Nelms said acceptance costs are becoming a huge issues with merchants, adding that merchants paid $20 billion last year in Visa and MasterCard fees, compared to half as much in 1995. One innovation Nelms pointed to is PIN transactions on the Web as an alternative to credit card payments. “A number of companies are looking into ways of using PIN debit on the Internet,” he said. “We're all anxious to see how that works out.” Currently, the major EFT networks allow PIN-based debit transactions only for payments to such so-called safe-biller categories as utilites and insurance companies. In these transactions, consumers use their PIN card account without entering a PIN. Most networks have shied away from PIN debit on the Internet, fearing the potential for fraud and for the looting of checking accounts should PINs become compromised. Speaking to Digital Transactions after his speech, Nelms repeated that concern and stressed there are no definite plans so far at Discover or Pulse to introduce a PIN payment product for e-commerce.