Discover Claims Retailer-Friendly Debit, But Details Remain Murky

More than a month after officially unveiling its much-anticipated entry into the signature-debit card market, details of Discover Financial Services Inc.'s debit card strategy remain sketchy. Discover's sales pitch to financial institutions to issue its debit cards is built around its ability to offer issuers an interchange rate that is competitive with the rates offered by Visa U.S.A. and MasterCard International, but which will not eat up as large a portion of merchant revenues on a per-transaction basis. “Our promise is to provide issuers with competitive interchange rates, while continuing to remain merchant-friendly on that issue,” says Harit Talwar, executive vice president of Discover. “One of the advantages we offer issuers and merchants is a simplified, low-cost, trustworthy network.” Discover officials also say they intend to target issuers with a large percentage of customers that currently do not have debit cards that can be used at the point-of-sale or that currently do not carry a Visa or MasterCard branded debit card. “We think we can offer a point-of-brand differentiation with consumers that financial institutions can leverage to grow their debit business,” says David R. Schneider, vice president for corporate debit strategies at Discover and executive vice president for Houston-based Pulse electronic funds transfer network, a Discover unit. “We are offering issuers a choice they can use to target specific segments of their customer base.” Schneider will officially succeed outgoing Pulse CEO Stan Pair in April. Paur will remain as chairman. The acquisition of Pulse by Discover in late 2004 gives Discover a mature PIN-debit network with direct connectivity to leading processors and merchants and access to more than 4,200 member financial institutions. Because it is not a membership association, Discover insists it has lower operating and administrative costs that can be passed along to issuers and merchants in the form of interchange rates that are less than those assessed by Visa and MasterCard, but which are still attractive to issuers. Despite Discover's claims of being both issuer- and merchant-friendly, little, if any, information about interchange rates for Discover debit and the network fees to be charged issuers appears to be circulating through the market. The dearth of information has led to speculation that Discover may only try to slightly undercut the rates charged for Visa and MasterCard debit transactions as a way to curry the favor of issuers, without completely alienating merchants. “Discover is offering a new debit-pricing platform, which merchants can only compare to those offered by Visa and MasterCard,” explains Ariana Michele-Moore, a senior analysts for Celent LLC. “Knocking a few cents per transaction may not be all that great, but it is better than what exists.” Whether it will be enough for Discover to gain significant market share in debit remains to be seen.