American Express Co. and Discover Financial Services are expected to significantly close the acceptance gap with Visa Inc. and MasterCard Inc. next year as the two smaller networks' merchant-acquirer partners aggressively sign up retailers.
"We're going to see a significant increase in merchant acceptance of all four brands, both from existing electronic merchants and new merchants," said Barry McCarthy, the president of product and business development at First Data Corp.
His Denver company, a holding of Kohlberg Kravis Roberts & Co., is the only merchant acquirer that works with all four networks — but others are expected to follow.
Analysts predicted that in two to three years most merchants would accept cards from all four networks.
At least one acquirer that is a Discover partner has been putting all new merchant clients on each of the three networks it works with — Visa, MasterCard, and Discover.
Diane Donoghue, an executive vice president and general manager of retail network services at Chase Paymentech, said that since September it has automatically put all new merchants on the Discover network, "just as we board them on Visa and MasterCard." Merchants that do not want to take Discover can call Chase Paymentech to opt out, but "that typically doesn't happen," she said. "Merchants want to accept as many cards as they can."
Chase Paymentech, a Dallas joint venture of First Data and JPMorgan Chase & Co., plans to bring older clients onto the Discover network eventually, she said.
Adil Moussa, an analyst at the research firm Aite Group LLC, said that more competition among networks would make Visa and MasterCard stronger advocates for their brands and less focused on being advocates for their card-issuing customers.
Aaron McPherson, the research director for payments at Financial Insights, a Framingham, Mass., unit of International Data Group Inc., said that more merchant acceptance of the Amex and Discover brands and expanded consumer choice would force the bigger networks to rethink their bank relationships.
"They're not going to see banks as their direct customers any more but as their distributors," he said, "and merchants and consumers are going to become their customers."
Discover and Amex are known as closed-loop networks because they traditionally have issued their own cards and handled merchant relationships, but the term increasingly is a misnomer.
Since late 2004, third-party banks have been issuing cards on the Amex and Discover networks. And last year, Discover made a deal under which First Data signs up merchants to accept Discover cards and processes transactions for them. Discover has since signed deals with most of the other major acquirers, and this month Amex signed a similar deal with First Data.
Chase Paymentech is in "preliminary discussions" with Amex, Ms. Donoghue said. "Further discussions are scheduled in 2008."
Mr. Moussa predicted that most acquirers would require their merchants to accept all the networks with which they have agreements.
"It's all increased volume for acquirers," Mr. Moussa said. "They can tell merchants, 'If you don't want to take it, don't advertise it.' "
Thomas Brown, an antitrust and payments lawyer and partner at O'Melveny & Myers LLP, said he did not think such a requirement would be illegal because it would not hinder choice or competition.
"To have an antitrust case you need to have conduct that people can plausibly criticize as anticompetitive, which generally means exclusionary," Mr. Brown said. "As an antitrust question, it's difficult to see what the objection would be here."
Matthew Johanson, Discover's vice president of acquirer relations, said merchants recruited by third-party acquirers can opt out of its network at "any point." However, he said, "we rarely see a merchant de-select a network out of an integrated package."
Discover executives have said that it is aiming for its cards to be as widely accepted as Visa and MasterCard by 2009.
American Express and Discover, along with acquirers, have said that their partnerships with acquirers make smaller merchants' lives easier by giving them the convenience of dealing with one vendor for all their cards.
Discover has not disclosed how many merchants it has added to its network, but Mr. Johanson said the fact that Amex followed it in using third-party acquirers shows the strategy is working.
"The market has validated integrated packages as a way to go," he said.
However, unlike Discover in its acquirer deals, Amex did not give up control over pricing in its First Data deal. Bryan O'Malley, Amex's vice president of small-merchant acquisition, said the company wants to be consistent with its current structure.
For this reason, Mr. McPherson said, "I see Discover closing the gap more quickly and more in the end than American Express — but I don't think that American Express is interested to entirely close the gap; they want to retain their higher prices."
Ms. Donoghue said that, in a potential deal with Chase Paymentech, Amex could "possibly" keep pricing control and that such a deal "may be a little different than the one with Discover."