Discover To Allow Surcharges; Adds Debit

  Discover Financial Services Inc. had a busy February. First it agreed to drop its "no-surcharge" rule that bars merchants from charging consumers fees for paying with Discover cards. Then it announced the launch of a Discover signature-debit card to compete with the Visa check card and debit MasterCard.
  By dropping its no-surcharge-policy, Discover was dropped from a lawsuit filed by an Atlanta-based merchant and its attorneys at Friedman & Shube in New York City and Reinhart Wendorf & Blanchfield in Minneapolis. The lawsuit initially was filed against Visa by Animal Land Inc., which contends retailers should have the right to surcharge card purchases to cover their interchange costs.
  The suit grew to include as defendants MasterCard International, American Express Co. and Discover, and it was consolidated with suits challenging Visa and MasterCard interchange policies. U.S. District Judge John Gleeson in the Eastern District of New York is hearing the consolidated suit. James Orenstein, a U.S. magistrate judge for the court, was scheduled to hold a status conference regarding the litigation on March 8.
  Discover announced in a statement that it intends to notify merchants of the policy change this April or May and will make it effective this October.
  The Discover rule change means a merchant would be free to charge a fee at the point of sale when a customer pays with a Discover card, fees that are prohibited by Visa and MasterCard. However, while MasterCard says it stands by its no-surcharge rule, it noted in a statement that "we understand that there are some situations in which merchants would like to have the ability to surcharge customers." MasterCard said it regularly reviews its rules, and "we cannot rule out a change at some time in the future."
  Visa said in a statement that surcharging is the wrong approach and "unfairly penalizes cardholders who choose to pay with plastic."
  An American Express Co. spokesperson says it does not have a no-surcharge policy. However, Friedman & Shube contends that AmEx rules effectively force merchants to follow Visa and MasterCard no-surcharge policies if they agree to accept AmEx cards.
  Allowing merchants to surcharge probably will not help Discover, says Ariana-Michele Moore, senior analyst at the Boston-based consultancy Celent Communications. Moore also questions whether Discover has the market pull to convince merchants to change their transaction-processing systems to allow for surcharges.
  "If-and it's a big if-merchants went through the hassle of updating their processing systems to charge an additional fee to Discover customers, and they went through the hassle of disclosing such fees, Discover would lose business, not the merchant," says Moore.
  Meanwhile, Discover says its signature-debit card will have a more streamlined issuer fee structure than that of the Visa check card and debit MasterCard. David Schneider, president of Discover's Pulse debit network, says the new Discover Debit card will be marketed to small- and mid-sized institutions. He says issuer fees will vary with volume, but there will not be as many tiers as in the Visa and MasterCard systems.
  Schneider says Visa or MasterCard issuers can continue those relationships while issuing the Discover debit card for products such as payroll cards. Discover has not announced publicly its debit interchange rates.
  Evelyn Miller, vice president at Alamogordo, N.M.-based Otero Federal Credit Union, says Otero will consider Discover Debit when its issuing contract expires in 2007. "The credit union has a competitive bidding process, and I'm sure we'll hear from Discover," Miller says. Miller says she doubts Discover would have much success within her credit union, though, because most Otero members prefer Visa.
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