In an agreement expected to help it win its first retail bank partner, Discover Financial Services said Metris Cos. Inc. will issue cards on the Discover network.
The agreement, announced Monday, would be a significant step by itself, but its strategic value for the Riverwoods, Ill., credit card unit of Morgan Stanley is magnified by Metris' deal to sell itself to HSBC Holdings PLC.
David W. Nelms, the chairman and chief executive officer of Discover, called the Metris agreement "one more step towards broadening our coverage of participating issuers." Once the HSBC deal closes next quarter, "our expectation is that HSBC will become an issuer" as well, and would become the first retail banking company to issue Discover cards.
Over the long term, Discover wants to have "multiple issuers on our network to cover multiple types of consumers," he said.
Discover had long been shut out of the bank issuer market, because Visa U.S.A. and MasterCard International permitted banks to issue either Visa and MasterCard products, or both, but only if they did not issue cards from Discover or American Express Co.
Those rules were struck down in October when the Supreme Court declined to review a lower court's decision that they were unfair. Since then both Discover and Amex have been trying to forge partnerships with issuers, including retail banks and credit card companies.
Mr. Nelms said that Discover has completed several such deals, though none with retail banks. Most notably, GE Capital Inc. announced in January that it would offer a card for Wal-Mart Stores Inc. that runs on Discover's network. (A GE Capital spokeman said his company has retail banking branches in Europe but none in this country.)
Having HSBC as an issuer would be a strong endorsement of that network and would provide Discover with a major new customer base.
Aaron McPherson, the manager of payments research at Financial Insights Inc., a Framingham, Mass., unit of International Data Group, said the deal with Metris would give Discover an "entree into HSBC, so I think it's a big step forward for them."
He also said having HSBC on board increases the value of the card company. "Discover can expect to get more banks signed up."
Mr. Nelms said Discover began its talks with Metris before HSBC announced its $1.59 billion deal last month.
Tom Nicholson, a spokesman for HSBC, would not discuss the Metris-Discover deal. He said it was too early to say what would happen to Metris' operations once they becomes part of HSBC, except to say the card company would be integrated "into our card services business."
Matt Melius, an executive vice president of Metris and the president and CEO of its Direct Merchants Credit Card Bank, which would issue the Discover card, said HSBC seems to have tacitly approved the partnership with Discover.
"HSBC was obviously aware that we having these discussions," he said. "They were comfortable at that time with the direction we were going."
Both Metris and HSBC mostly issue MasterCard products, as well as a small number of Visa ones.
MasterCard, of Purchase, N.Y., announced its own deal with Metris on Monday to issue a cobranded card with the Red Hat Society, a women's group. This month MasterCard also announced a deal to offer a cobranded card with Henry Modell & Co. Inc.'s Modell's Sporting Goods chain.
Neither Mr. Melius nor Mr. Nelms would discuss the financial details of the issuing agreement, but they said it is a long-term one. Metris expects to begin issuing credit cards with the Discover logo on the front of the card that will run on the Discover network, though they will be considered Metris cards rather than Discover cards.
Mr. Nelms said the Metris deal would give Discover access to a new set of customers.
Some of Metris' customers "are people who do not qualify for Discover cards, but are much more likely to qualify for cards that [Metris] issues," he said. "It's a way for consumers to get a card that's issued on the Discover network, and it enables us to get volume on our network without changing our credit scores or taking any additional risk on Discover card."
According to Metris, the deal would also add a new flavor to its direct mail marketing campaigns.
"Everyone will tell you, if you mail the same card marketing pieces over and over, eventually you start to lose some of the effect, and you have to look for ways to freshen that up," Mr. Melius said. "Being able to issue a product on the Discover network gives us a new twist to the same pool."
