Discover’s First Data Deal May Be Just Its First Pact with Big Acquirers

Discover Financial Services LLC's new merchant-processing pact with leading payment processor First Data Corp. that involves small and mid-sized merchants is just the first of more deals Riverwoods, Ill.-based Discover plans to strike with big merchant acquirers to expand acceptance of the No. 4 card brand while simultaneously reducing costs. “We are in discussion, I can't give you details, with some of the major acquirers who have expressed a strong similar interest. Let's see what happens,” Harit Talwar, executive vice president of Discover Network, tells Digital Transactions News. Discover for years has had sales agreements with big bank card acquirers that sell Discover acceptance to smaller merchants when they sell Visa/MasterCard payments. But the pact announced Friday with Greenwood Village, Colo.-based First Data goes beyond just sales. First Data will provide authorization, settlement, statements, customer service, and risk management to small merchants, functions Discover traditionally has done itself. In addition, First Data will set pricing on the accounts it sells, though Discover will set price ranges for the applicable merchant segments, Talwar says. First Data says it will own the merchant relationships on the accounts that it books. “First Data's sales channels will actively pursue new merchants for Discover card acceptance and will own the new merchant accounts with First Data providing the processing services and infrastructure,” an FDC spokesperson tells Digital Transactions News via e-mail. First Data and Discover did not release financial terms, but the deal aligns Discover with a processor that serves 4.6 million locations. Discover, which operates mostly in the United States, has about 4 million merchant outlets in its network compared with 6 million for Visa and MasterCard in the U.S. Discover will realize less revenue per transaction through the deal but will also incur reduced costs, Talwar says. Neither party would give projections for number of merchants or transaction volume expected from the alliance. Bringing in other acquirers besides First Data could add up to even more acceptance for Discover in the small-merchant segment because of bank card acquirers' extensive relationships with independent sales organizations that can reach small merchants easier than Discover can directly, according to processing consultant Paul R. Martaus of Martaus & Associates in Mountain Home, Ark. “If you're up against saturation, your cost per call goes up,” he says. At the same time, the deal brings a new stream of volume to First Data at a time when it's reconfiguring its business lines and spinning off its biggest division, Western Union. “First Data is under tremendous pressure,” says Martaus. “Being the industry leader, one presumes they're the target for everybody.” For merchants, the new pact will provide better service through “fewer touchpoints,” according to Talwar. For instance, a merchant experiencing problems with transactions has to call one number for Discover and another for Visa/MasterCard transactions. Now only one call will be needed. “We want to focus on how we can make the payments industry more efficient … and more convenient for [small merchants],” says Talwar. Discover and First Data will begin implementing the new arrangement later this summer, with a wider-scale rollout by year's end. Discover will continue to service large merchants directly.