One of the top priorities for the newly independent Discover Financial Services LLC is boosting acceptance by small merchants, according to David Nelms, its chief executive.
In an interview Monday, the Riverwoods, Ill., card company's first day of public trading, Mr. Nelms said the strategy that it initiated last year of using merchant acquiring processors to attract small merchants is working. Related Link
Mr. Nelms said one of his main goals is to increase transaction volume by about 15% a year, and that getting more small North American merchants to accept Discover cards will help him achieve that. Discover has long handled its own sales, but last year it began working with companies such as First Data Corp., and Global Payments Inc. to reach small merchants.
Merchant acceptance is "a very important goal, because that helps drive what we can do, both on the card segment and third-party payments business," Mr. Nelms said.
His company officially spun off June 30 from Morgan Stanley. Its shares had been trading on a when-issued basis since June 14 and began trading publicly Monday on the New York Stock Exchange under the symbol "DFS."
The stock closed at $28.50 a share Friday, and opened Monday at $28.55; it closed out its first session at down 3.51%, at $27.50.
Mr. Nelms discounted the first day's trading activity. "You can't make any judgment based on any short-term performance," he said. "You're going to likely continue to see some volatility, and what will matter is our long-term execution of our strategy, not short-term stock performance."
One of Discover's advantages in the card industry is its PIN debit network, Pulse EFT Association of Houston, which has been gaining market share, Mr. Nelms said. He hopes to capitalize on Pulse's direct relationships with roughly 4,400 banks to help increase issuance of Discover cards.
Wall Street is not expecting Discover to match the amazing performance of MasterCard Inc., which went public in May of last year with a share price of about $39 and closed Monday at $166.35. Visa International is planning to go public next year, and American Express Co. has been public for years.
Sanjay Sakhrani, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., has a 12-month target price of $30 for Discover's stock. He said that most of the initial stockholders are Morgan Stanley investors; as part of the spinoff, they received a share in the card company for every two shares they held in the investment banking firm.
"The shareholder base is going to change." Those who might normally invest in investment banks like Morgan Stanley do not "want consumer finance exposure," Mr. Sakhrani said. "This is not unusual."
Over the next week "people are going to choose … which side they want to be on," he said.
Craig Maurer, an analyst with Credit Agricole SA's Calyon Securities, said that Discover did not seem to have a long-term plan for increasing market share when it was presenting its story to the investment community before the spinoff.
Mr. Nelms "hasn't been able to provide a clear strategy to the Street, other than increasing merchant acceptance, but increasing merchant acceptance doesn't solve his problem" that more than 50% of Discover's card portfolio is inactive, said Mr. Maurer, who has a 12-month target price of $24 on the stock.
Discover needs a "new hook" in terms of rewards that could boost its activation rate, he said.
Its main reward program offers cash back, but other issuers, such as JPMorgan Chase & Co., have begun offering cash-back programs, and Discover has "lost its audience."
Mr. Maurer also said that Discover should invest more in marketing, perhaps on television advertising, to make its brand better known.
But Mr. Nelms said that he did not think such spending was necessary, and that Discover will maintain its level of TV advertising.
"We don't expect to make dramatic changes one way or another," he said. "The bulk of our dollars will continue to go to direct marketing and direct mail. That plus the Internet are the two most targeted methods for account acquisition … using credit bureau information to get the right products into the right consumers' hands."
