December 20, 2012
In the wake of its path-breaking partnership with PayPal Inc., Discover Financial Services is ready to do more deals with other companies that will add transaction volume or build its acceptance footprint, chief executive David Nelms indicated on Thursday. Nelms also told stock analysts that growth in the Discover-owned Pulse electronic funds transfer network might have been greater had it not been for actions by the “Goliath in the industry,” a reference to Visa Inc.’s efforts to defend its U.S. debit business in the wake of the Durbin Amendment regulations.
Nelms’s comments about potential new deals came in response to an analyst’s question during Discover’s earnings conference call for its fourth quarter of fiscal 2012 about whether Discover was looking for new deals akin to the one it struck last August with leading online alternative payments provider PayPal. That pact could bring PayPal acceptance to the 7 million merchant locations in Discover’s network.
Nelms would not talk about specific companies, but replied that Discover indeed is on the lookout for new partnerships, though he doesn’t expect another one just like PayPal to come along. “There is no one else in the market that’s exactly positioned the way they are, so what I expect is not other PayPal-like deals, but other deals that are also disruptive in different ways,” he said. “We are talking to a number of partners who see our flexibility and unique assets as a big opportunity ... I am certainly hopeful that as we get into next year that we’ll have additional partners to be talking to you about.”
Later, he fielded a question about what an analyst noted was a slight slow-down in Pulse’s growth in the fourth quarter ended Nov. 30. Pulse posted volume of $39.4 billion, up 16.1% from $33.9 billion in fiscal 2011’s last quarter. In the third quarter, Pulse’s volume increased 16.8%. The analyst wondered how Visa’s Fixed Acquirer Network Fee (FANF) or other recent measures to defend its debit business might be affecting Pulse.
While Pulse’s 16% growth is respectable, Nelms indicated it could have been greater but for the actions of Visa, whom he did not mention by name. “It would have been even higher without some of the competitive challenges, I’ll say, and one of those competitors is the Goliath in the industry,” he said. “As they continue to roll out some of these new, kind of hijack-transaction actions—a lot of those are just being rolled out now and will have an increasing effect on all the other competitors in the market, including Pulse.”
A Visa spokesperson declined comment.
Pulse, like many other EFT networks, has benefited to some degree from the Federal Reserve’s transaction-routing and network-exclusivity rules implementing the debit card provisions of the Durbin Amendment in 2010’s Dodd-Frank Act. The rules, which took effect in April, outlawed exclusive tie-ups between debit card issuers and networks, and gave merchants more transaction-routing choices. The effect was to divert more than half the volume from market leader Interlink, Visa’s PIN-debit network, to rivals such as MasterCard Inc.’s Maestro, Pulse, and other networks that offer PIN-debit acceptance services to merchants.
In response, Visa created its FANF, which rewards merchant acquirers with lower variable processing costs if they send more transactions Visa’s way. Visa also is implementing its PIN-Authenticated Visa Debit program that enables Visa to process a PIN-debit transaction even if the card doesn’t have the Interlink mark. Both the U.S. Department of Justice and the Federal Trade Commission are investigating aspects of Visa’s debit business. Visa says it complies with antitrust laws and is cooperating with authorities.
Thursday wasn’t the first time Nelms has criticized Visa’s post-Durbin debit strategy. In June, he said “we continue to remain concerned about one competitor’s actions in the market.”
Meanwhile, sales volume on the Discover credit card increased 6% in the fourth quarter to $26.5 billion. Total volume on Discover, Pulse, and Diners Club International cards came in at $76.4 billion, up 10.4% from $69.2 billion a year earlier.
Pre-tax income in Discover’s Payment Services unit declined 21% from a year earlier to $33 million, a decline Nelms attributed mostly to higher expenses at Diners Club. Discount and interchange revenues grew 6.5% to $521 million. The company, which gets the majority of its revenues from lending, posted $2 billion in revenues net of interest expense, up 10.6% from $1.81 billion. Net income attributable to common shareholders grew 6.5% to $541 million.
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