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This article appears in the Dec. 18, 2008, edition of ISO&Agent Weekly.
When Discover Financial Services and American Express Co. separately decided to open their once-proprietary networks to third-party acquirers within the last couple of years, it set the stage for a new era of competitiveness with card-network giants Visa Inc. and MasterCard Worldwide.
Discover and AmEx each signed agreements with a variety of merchant processors to enable their card brands to be accepted for the first time alongside Visa- and MasterCard-branded cards as part of an integrated acceptance service. At their option, merchants now can accept all four major card-network brands, receive one consolidated monthly statement and use a single point of contact for customer service.
With these agreements came an acceptance of using ISOs as a conduit to merchants.
The networks' goals were to simplify how merchants can accept their cards, paving the way for them to expand their respective card-acceptance reach, especially among small and mid-sized businesses that previously accepted only Visa and MasterCard.
But as the majority of the two companies' new agreements went live late this year–following months of back-office work to integrate the systems–stark differences in Discover's and AmEx's acceptance-expansion strategies are emerging.
Analysts say the distinctly different paths the two companies are taking underscores their diverging business models and long-term goals.
Discover Branches Out
Discover has moved to use the new arrangements to maximize its acceptance points, attempting to close the acceptance gap with Visa and MasterCard that analysts say has hurt Discover's revenue growth. As a result, broader card acceptance has become central to Discover's survival and its plans to become a global brand. AmEx, by contrast, seems to be placing a lower priority on getting card acceptance in every retail nook and cranny.
"Discover's success so far in expanding merchant locations is worth noting, while AmEx's progress is less clear," says Scott Strumello, an associate with New York-based Auriemma Consulting Group. "It appears that Discover wants to be accepted everywhere, and AmEx is still choosing its merchant locations more carefully."
The key difference between the two companies' approaches is Discover's decision to cede to third-party acquirers control of the merchant relationships, including owning the contract and setting Discover's transaction-processing price. AmEx opted to retain control over its merchant contracts and card-transaction pricing in its third-party acquirer agreements. While merchants may accept AmEx in an integrated arrangement alongside Visa, MasterCard and Discover, they must negotiate separately with AmEx on contracts and transaction pricing.
Since signing its first integrated card-acceptance deal with First Data Corp. in mid-2006, Discover touts huge gains in merchant-acceptance points over the last two years.
The No. 4 card network in terms of volume has signed 88 agreements with third-party acquirers, including the nation's 10 largest, Discover says. With most of those agreements kicking in during the second half of 2008, Discover says it now shares 98% of the potential acceptance points of both Visa and MasterCard, up from 77% in 2005. Discover says that through the final months of last year it was signing up an average of 6,000 merchants per day.
Giving Acquirers Control
Giving acquirers control over Discover's transaction pricing is a powerful incentive for third-party operators to promote Discover acceptance, says Matt Johanson, Discover vice president of acquirer relations. "Acquirers can earn the same type of margins selling Discover card acceptance as they do selling Visa and MasterCard acceptance," he says, noting Discover retained direct relationships with a core of large, national merchants.
Merchant acquirers applaud Discover's approach.
"Customers love it," says Debra Rossi, executive vice president and general manager for Wells Fargo's Merchant Payment Solutions division. "The former approach was very awkward because we couldn't provide merchants with a discount rate for Discover or help with customer-service problems. Under the agreement we signed last year with Discover, merchants don't need to make any special effort to accept Discover. Not only has it been extremely easy to enable existing customers to add Discover card acceptance, but it's even easier to sell it to new customers."
