Discover Chief Says Pulse Has Beefed up for Expected Durbin Volume

With final debit card regulations at hand that will end exclusive partnerships between payment networks and debit card issuers, the head of Discover Financial Services says his company has added capacity to its Pulse electronic funds transfer network to handle anticipated new business.

n

“Our Pulse network is highly scalable; we have taken actions to build capacity in advance of potential demand … and if we need to add even more capacity, we will add even more,” Discover chairman and chief executive David W. Nelms said Thursday during an earnings conference call with analysts.

n

Nelms was responding to a question about Discover’s plans to handle potential new volume because the Durbin Amendment debit card regulations set to take effect July 21 will ban so-called exclusive network arrangements on the cards. An example would be a card offering only the Visa network for signature debit and the Visa-owned Interlink network for point-of-sale PIN-debit purchases. Industry observers believe the outlawing of such arrangements, very common with banks and networks, will divert business from Visa Inc., the debit leader, and benefit rivals such as MasterCard Inc., Pulse, Star, NYCE, Accel-Exchange, and others.

n

Nelms, however, sounded a cautious note, saying nothing is assured until the Federal Reserve Board issues its final rule to implement the Durbin Amendment, a part of the 2010 Dodd-Frank Act. The Fed has scheduled a vote on its much-anticipated regulations for next Wednesday, regulations hailed by retailers as lowering their debit interchange costs by 70% or more and giving them more transaction-routing freedom. The Fed floated preliminary rules last December that left open the possibility of a card carrying one brand for signature debit and that of at least one unaffiliated PIN-debit network, as most observers expect, but also of cards carrying two signature and two PIN-debit marks. “I think there’s a lot we don’t know right now,” said Nelms.

n

Discover, primarily a credit card brand, could benefit under the latter scenario since it does have a signature debit product. Nelms said that card’s market share is “tiny” compared with Visa and MasterCard’s, but added that “we certainly remain poised” to grow the product.

n

Boosted by new issuer business and debit’s overall popularity, Pulse set a quarterly record of 1 billion transactions in the second quarter, up 25% from 805 million a year earlier. Dollar volume grew 28% to $36.7 billion versus the prior-year period’s $28.6 billion. Discover Network transactions increased 7% to 422 million from 393 million in fiscal 2010’s second quarter, and proprietary Discover charge volume hit $25.7 billion, up 9% from $23.6 billion a year earlier. Including the company-owned Diners Club network and third-party cards running over its networks, Discover Financial Services processed 1.43 billion transactions in the quarter, up 19%, and $71.6 billion in charge volume, up 18%.

n

On another matter, mobile payments, Nelms revealed that Discover has 500,000 cards in issue with its Zip contactless chip. After lengthy testing, Discover began rolling out Zip cards and contactless stickers for mobile phones late last year. Nelms talked about Zip when asked about Isis, the AT&T/Verizon Wireless/T-Mobile joint venture for mobile payments that initially had Discover as its payment-network partner and the U.S. card operation of Britain’s Barclays Bank as its issuer. In a change of course, Isis is now opening its system to other networks and issuers. Isis will use near-field communication (NFC) technology, but payment terminals that can read contactless cards and fobs such as Zip, MasterCard’s PayPass, Visa’s payWave and American Express Co.’s ExpressPay also can interact with mobile phones equipped with NFC chips.

n

“I remain bullish on the potential for mobile payments, and we continue to be very active not only with Isis, but also with many other efforts throughout the industry,” Nelms said. “Importantly, we continue to expand mobile-enabled terminal deployment throughout the country and our Zip has very broad representation in terms of acceptance on terminals. We also have passed the half-million account mark in terms of cards that have Zip, and we have really focused our efforts on some of the early adopters and people who have requested cards so we continue to make progress on a lot of fronts with it.”

n

Nelms added that, “it’s going to be tough” to pick winners and losers in mobile payments, “but I am convinced that it will gradually gain traction and be important for us and our customers.”

n

Isis this week revealed that Austin, Texas, would be its second launch market, with operations set to begin next year. The venture’s first market is Salt Lake City, Utah.

n

On the financial front, Riverwoods, Ill.-based Discover posted record net income of $600 million in the second quarter, more than double the year-earlier period’s $258 million in profit.