A Flurry of Deals Energizes Discover

  August usually is a quiet month for business. Executives go on vacation, turning off their cell phones and unplugging their laptops before heading off to some beach to bake in the sun. They leave messages on their office voicemail, saying they won't check them until after Labor Day.
  Discover Financial Services LLC, the Riverwoods, Ill.-based issuer of Discover card, however, has added a new chapter to the September classic "How I Spent My Summer Vacation" by issuing a slew of major announcements, three in August alone. Discover's aggressive behavior this summer reflects a change in the issuer's business plan to attract issuing banks' attention, analysts say. Discover is trying to make the new card landscape work for itself following a landmark 2001 court decision. That ruling upheld the U.S. Department of Justice's position that rules implemented by Visa USA and MasterCard International (now MasterCard World-wide) that prohibited their member issuers from also issuing Discover and American Express Co. cards violated federal anti-trust laws.
  The card associations appealed the ruling by U.S. District Judge Barbara S. Jones. An appellate court later upheld Jones' decision, and the U.S. Supreme Court in October 2004 let stand the ruling.
  The case has created new opportunities, and new headaches, for Discover.
  "[Discover] now has to compete with Visa and MasterCard for issuing banks' business," says Gwenn B?zard, research director at Boston-based consultancy Aite Group. "Before the court decision, Discover could not have cared less about bank issuers because it issued its own cards. By announcing this summer major new initiatives, Discover is trying to get issuing banks' attention."
  "Our goal is to grow the business," Hochschild says. "When we sign agreements, we aggressively move to announce them. Some of these agreements we have been working on for more than a year."
  The summer months often can be slow for major business news stories. At the same time, they are good months to issue press releases because there is very little going on, forcing media outlets to scrounge for good stories.
  Roger Hochschild, Discover's president and chief operating officer, agrees the DOJ decision opened new opportunities. But he denies that Discover waited until the slow news days of summer to announce new agreements.
  Still, Discover has made news.
  In June, Discover announced the launch of the Discover Business Card, its first card product for businesses. "The Discover Business Card provides the opportunity for the company to take a leadership position in the small-business payments space by addressing the underserved needs of the small-business owner," said David Nelms, chairman and CEO of Discover Financial Services.
  PROCESSOR DEALS
  Discover followed up its small-business card announcement with the launch in August of Discover Small Business Watch, a monthly index that measures small-business owners' and consumers' feelings about the economy. The index, which will be posted on the soon-to-be launched Web site Discoverbiz.com, incorporates the findings of one of three surveys Discover is taking to elicit the feelings of small-business owners and their customers, says Sastry Rachakonda, director of the Discover Business Card, a credit card for small-business owners.
  In July, processor First Data Corp. and Discover announced plans to integrate their processing networks, and First Data will expand its merchant acquiring for Discover. The deal means First Data will provide statementing and customer support to Discover's merchants. Discover followed that announcement with two similar ones in September with Global Payments Inc. and RBS Lynk, the U.S. payment-processing division of Royal Bank of Scotland.
  The Global Payments' deal is a merchant-acquiring agreement in which Global will begin selling Discover Network card acceptance. Global, with its alliance partners, and independent sales organizations, will offer its merchant base an integrated processing solution that includes Discover card acceptance. Global also will purchase the portion of Discover's merchant portfolio that provides Visa and MasterCard processing.
  RBS Lynk's agreement similarly calls for offering an integrated payment card processing package that includes Discover card acceptance, starting in November.
  Discover this summer also teamed with JCB Co. Ltd., Japan's largest issuer and merchant acquirer. The agreement allows each issuer's cardholders to use their cards at merchants affiliated with the other's networks.
  MARKETING PUSH
  Improved marketing also was on Discover's summer agenda. The company in August launched a new advertising campaign, its most extensive in 20 years.
  The campaign, called "What If," urges cardholders who are dissatisfied with their current cards to switch to Discover, says Mark Hosbein, Discover senior vice president of brand management and advertising. The campaign's graphics portray animated scissors cutting up competing cards being fed to them by dissatisfied but smiling cardholders.
  In September, Discover reported record third-quarter pre-tax income of $368 million, up 54% from $239 million during the same three-month period last year. Net revenues were $1.05 billion, up 15% from $911 million in 2005's third quarter.
  Interspersed among the major announcements were smaller ones, including four financial institutions that agreed to issue credit and prepaid cards over the Discover Network. The network also announced an exclusive deal with Dollar Tree Stores Inc. in which its more than 2,100 locations will accept Discover cards and no others. Discover made those announcements in June and July.
  Discover is becoming more aggressive in getting its name out in front of issuing banks because the traditional method of growing receivables is declining, both for it and the rest of the card industry. Discover traditionally has acquired new consumer cardholders through mass mailings.
  This has not helped receivables, however.
  Discover's 2005 receivables were $46.9 billion, down 3% from $48.3 billion in 2004, according to the SourceMedia's Card Industry Directory. Receivables are down because Discover is focusing on credit quality by reducing delinquencies and cutting back on balance transfers, Hochschild says.
  The issuer has had trouble getting issuing banks' attention for two key reasons, B?zard says. Discover traditionally has set relatively low interchange rates. That may be sweet music to merchants' ears, but issuing banks are tone deaf to the very idea because it means less money in their pockets.
  "Interchange is becoming more and more important to card issuers as a source of revenue as receivables growth declines," B?zard says. "Consumers are finding other ways to make purchases without using their cards."
  But Hochschild argues that Discover can offer competitive interchange income for issuers and a competitive discount rate for merchants by running the business more efficiently.
  Issuing banks also are not as interested in forming partnerships with Discover because its cardholders are mostly blue collar. American Express, on the other hand, brings banks high net-worth customers, B?zard says.
  AmEx has signed cobrand agreements with a number of banks, including Bank of America, Citibank, HSBC North America Holdings, Barclays Bank of Delaware (formerly Juniper Bank) and USAA Federal Savings Bank. These financial institutions at one time only issued MasterCard or Visa cards.
  Discover's growth in bank partnerships since the DOJ court decision has been much more modest. It has agreements with HSBC and GE Consumer Finance.
  After the Supreme Court let stand the lower court rulings in the DOJ case, both Discover and AmEx sued the card associations, seeking unspecified damages because of Visa's and MasterCard's anticompetitive business practices.
  Court battles aside, things did not get easier for Discover because of other issues. In April 2005, Discover's future was placed in limbo when parent Morgan Stanley, in the midst of its own corporate upheaval, said it was considering spinning off Discover.
  Discover's executives spent several months figuring out how to survive as an independent company before Morgan Stanley announced in August of last year that it had changed its mind and took Discover off the market.
  Discover has tinkered with its business plan to attract issuing banks' attention. While only time will tell whether it will work, it is clear Discover will not shy away from publicity and will be an aggressive competitor.
  (c) 2006 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com