Just a month after a court ruling made it possible for Discover Financial Services to offer credit cards through banks, the company has agreed to buy Pulse EFT Association for $311 million.
Buying the Houston PIN debit network will fill a major gap in Discover’s portfolio and could pave the way for banks to issue Discover-branded debit cards as soon as January.
David W. Nelms, Discover’s chairman and chief executive, said the acquisition would round out his company’s strategy by “immediately adding distribution” and “a substantial base of financial institution customers.”
Discover will also gain “a management team and staff that is highly experienced in debit and that combines PIN debit and our signature debit capabilities,” Mr. Helms said in an interview.
“We think it is very important to be in debit,” he said.
Mr. Nelms noted that buying Pulse EFT would give the Morgan Stanley unit access to Pulse’s roster of 4,100 bank members.
Discover, of Riverwoods, Ill., plans to run its credit card network and the Pulse system separately.
Mr. Nelms said it is common for PIN debit and credit networks to have different brand names; Visa operates the Interlink debit network, and MasterCard’s PIN debit network is branded Maestro.
He said Pulse would be a separate unit and that its sales force would be retained. Stan Paur, Pulse’s president and chief executive, is to run the company from its Houston headquarters.
The deal was announced Monday and is subject to approval by regulators and Pulse’s financial institutions members. The Pulse board approved the deal in a vote held last Thursday and is recommending that its financial institutions approve it. It is expected to close by mid-January.
Mr. Paur said the deal makes sense for his company because the market is becoming both more competitive and demanding, “and the combination with Discover will enable us to compete effectively.”
Mr. Nelms said the addition of the Pulse network will create an alternative to Visa U.S.A. and MasterCard International, which dominate the market for banks that wish to issue debit and credit cards.
(The Visa and MasterCard rules that prohibited the associations’ bank members from issuing other card brands such as Discover and American Express were invalidated Oct. 4, when the U.S. Supreme Court declined to hear an appeal of a lower court’s ruling.)
Rosetta Jones, a vice president for San Francisco-based Visa, said in a statement Monday that the deal “is further evidence that the debit market continues to evolve.”
Discover has positioned itself as a credit card network alternative to Visa and MasterCard. Buying Pulse will put it “in a vastly better position,” said David Balto, a partner with Robins, Kaplan, Miller & Ciresi LLP and a former Federal Trade Commission lawyer. It will get “a leg up over MasterCard” because of Pulse’s “much stronger online debit presence,” he said.
Pulse is the third-largest electronic-funds-transfer network in the point of sale market, behind First Data Corp.’s Star and Visa’s Interlink, and ahead of Metavante’s NYCE, according to ATM & Debit News (which has the same publisher as American Banker). Pulse is the fourth-largest network, behind NYCE, when ATM transactions are included.
Gwenn Bezard, a senior analyst for Celent Communications LLC of Boston, said Discover and Amex feel they need to have “a foot in the debit card space if they want to remain in the card industry.”
He noted that Discover and Pulse charge merchants a lower interchange fee than their main competitors, which could help attract more merchants to both networks. Discover has wider merchant acceptance than American Express in the United States but is bested by Visa and MasterCard.
Mr. Bezard also said that Discover might be able to persuade small and midsize banks that Visa and MasterCard “don’t care about” them.
Tim Sloane, the director of the debit advisory group for Mercator Advisory Group Inc. in Shrewsbury, Mass., said the Discover deal for Pulse should not be seen as a sign that Morgan Stanley wants to match the move by its brokerage rival, Merrill Lynch & Co., into retail banking. That, he said, would “directly challenge the current Pulse financial institutions.”
What Discover “really wants to do,” Mr. Sloane said, “is get that debit business going by providing a product to the financial institutions that’s extremely competitive.”
