Discover Strategy Zeros In On Growing Debit Volume And Merchant Acceptance

With another solid quarter behind Discover Financial Services, the Riverwoods, Ill.- based company now says it is focused on increasing merchant acceptance of its cards, growing its Pulse PIN-debit network and boosting customer retention.

Discover on Sept. 20 reported a strong quarter for the fiscal third quarter ended Aug. 31, citing improvement in credit as the most significant factor (see story).

During the quarter, Discover’s U.S. card-sales volume totaled $24 billion, up 5.3% from $22.8 billion a year earlier. This increase marks the fourth consecutive quarter of growth based on average spend from loyal customers and the ongoing effort to increase Discover acceptance among merchants, David Nelms, Discover chairman and CEO, told analysts during the company’s earnings conference call.

“I was pleased with the 5% growth in Discover card-sales volume and the stabilization in our credit card loans this quarter, which were essentially flat in the second quarter of 2010, Nelms said. Nelms attributed some of the third quarter growth in card-sales volume to back-to-school spending.

Additionally, Discover this year signed the last of the top 100 acquirers in the U.S., and the company hopes acceptance by smaller U.S. merchants “will become more on par with Visa and MasterCard,” Nelms explained. 

Discover’s Pulse-network volume benefited from new issuing deals along with growth “from our continuing debit-issuer customers,” Nelms said. “We look forward to becoming an even more-aggressive competitor in the debit network space.”

Regarding recent legislation that bans issuers from striking exclusive debit deals with Visa Inc. and MasterCard Worldwide, Nelms said Discover is hopeful network competition will grow and Pulse to subsequently benefit.

Sales volume for Pulse during the quarter rose 8.9%, to $30.6 billion from 28.1 billion a year earlier. Total transactions processed on the Pulse network rose 17.1%, to $882 million from $753 million.

Discover has an opportunity to grow the processing aspect of its business, Gwenn Bézard, research director at Boston-based Aite Group LLC, tells PaymentsSource. Many alternative-payment companies are “looking for new payment [services], and Discover can provide access to merchants through its [Pulse] network,” he says.

For example, Discover in August reportedly teamed with AT&T Inc., Verizon Wireless and T-Mobile USA to work on a mobile-payment system along with Barclays PLC. In the purported partnership, which the parties never confirmed, Discover would provide the processing services and the transactions would move across the Discover network (see story).

As the credit environment continued to improve during the quarter, Discover increased its marketing budget back to pre-crisis levels, Nelms said. The company hopes its amped up marketing campaigns will target new customers and push existing customers to choose to use their Discover cards more often.

Discover in July announced the launch of several television and online advertising spots to tout the company’s dynamic customer service (see story). The company also announced it will be a title sponsor for college football's Orange Bowl for four years starting in 2011 (see story).

Additionally, because attrition rates are the lowest they ever have been, “retaining our current customers, growing our usage of current customers and getting new customers, in that order,” is what Discover will continue to focus on, Nelms said.

And while focusing on its customers, Discover does hope to further diversify beyond the card business with its planned $600 million student loan acquisition (see story).

What do you think about this? Send us your feedback. Click Here.