Discover Financial Services is tired of playing third fiddle.
The company's signature debit-card network, which lags far behind rivals Visa and MasterCard in enrolling banks, has decided to sweeten its pitch. Under a new deal with the American Bankers Association, the trade group's more than 4,000 member banks will be eligible for discounted pricing from Discover.
The specific financial terms for eligible banks were not disclosed. But Discover said that its Pulse network offers lower fees for signature debit than its two larger competitors, and the new agreement makes the terms even more attractive.
"Financial institutions are somewhat skeptical of change," Steve Sievert, executive vice president of marketing and communications in Discover's Pulse unit, said in an interview. "We've got to deliver something better to encourage banks to change."
Discover faces an uphill fight. Its Pulse network reported $42 billion in U.S. debit card volume in the second quarter, a figure that was dwarfed by Visa and MasterCard. Visa reported U.S. debit card volume of $432 billion in the second quarter, while the comparable figure at MasterCard was $177 billion.
For a short time after the passage of the Dodd-Frank Act in 2010, Discover benefited from new rules that require each debit card to carry at least one PIN debit network and a separate signature debit network. But Visa quickly rebounded, launching numerous strategies aimed at regaining market share. Last year Discover's debit-card volume was flat when compared with the previous year.
One hurdle for smaller card networks like Discover is the fact that banks generally make long-term commitments to a particular debit network. Often the deals last five years or longer, according to Sandler O'Neill analyst Christopher Donat. The cost of switching networks is high enough that banks often stick with their existing relationships, he said.
"Periodically, they get put in play," he said. "But unless there's a compelling reason to, it's generally a sticky, durable business."
Discover hopes that the shift from magnetic-stripe cards to chip cards will serve as an impetus for banks to reevaluate their choice of network. The Riverwoods, Ill., company expects that more than four out of five U.S. financial institutions will issue chip-enabled cards starting next year, Sievert said.
"You have a significant number of issuers north of 80% in the U.S. now who are going to be facing a reissuance to at least some extent in the near term. So this is an opportunity for them to look at that reissuance and take another look at Discover debit."
Discover's signature debit network got an endorsement from the ABA under the agreement announced Thursday. The deal includes undisclosed financial considerations for the ABA.
Bill Kroll, an executive vice president at the ABA, said that the discounted pricing will likely appeal to banks that have more than $10 billion in assets. Those banks are subject to the statutory cap on debit card swipe fees, so the only way they can make more money from each debit card transaction is by reducing the fees they pay to the card network.
Referring to banks with $10 billion-$25 billion in assets, Kroll said: "I think they will be looking at this very seriously."
On top of lower fees, Discover is using other tactics to entice card issuers to sign up for its signature debit network. For example, the company is touting the fact that banks can banish the Discover logo to the back of their debit cards, saving prime real estate on the front of the cards for the banks themselves.
The deal with the ABA does not apply to Discover's PIN debit network, which holds a stronger competitive position in the marketplace than the company's signature debit network. As of 2012, Discover's Pulse network had 18% market share in PIN debit, while MasterCard had 20%, and Visa had 35%, according to a Discover presentation from earlier this year.