Discover’s Chief Hits Visa’s Strategy To Defend Its Debit Market Share

The chief executive officer of Discover Financial Services isn’t too pleased with what Visa Inc. is doing to retain its lead in the debit marketplace now that the Durbin Amendment’s transaction-routing provisions are in place. Discover owns the Houston-based Pulse network, which like other electronic funds transfer networks stands to benefit from the new regulations at Visa’s expense.

“We continue to remain concerned about one competitor's actions in the market, but that being said I am pleased with how our Pulse team has responded,” David Nelms said Tuesday morning at the tail end of his opening remarks during Discover’s earnings conference call for the second fiscal quarter ended May 31.

Nelms did not mention Visa by name. Later, during the question-and-answer part of the call, an analyst said he assumed Nelms meant Visa and asked him to explain his comment. Nelms, again without mentioning Visa by name, responded:

“Obviously, in debit, one competitor represents 70% of the market share, so when that 70% market-share competitor makes moves tying products together and launching fixed-variable pricing designed to take advantage of that 70% market share, we and many others in the industry become concerned about having a level playing field. Having a level playing field, I’m very confident in Pulse’s ability to compete and bring choice and good financial performance for our financial-institution customers as well as our merchants.” Nelms also noted that the U.S. Department of Justice “has launched an investigation, so we’re not the only ones who have some concerns.”

The Durbin Amendment now requires debit card issuers to offer at least one unaffiliated network on their cards, which means that the many issuers whose cards offered only Visa’s brand for signature debit and the Visa-owned Interlink network for point-of-sale PIN debit needed to add one unaffiliated network. That provision, intended to give merchants and merchant acquirers more choice and lower prices in transaction routing, took effect April 1 and triggered a furious round of prospecting for new issuers by Interlink’s rival EFT networks in the months leading up to April. Visa recently reported that its total debit volume fell 12% in April versus April 2011, with Interlink being hit particularly hard, and has warned investors to expect more declines in the short term.

To defend itself in the new environment, Visa has come out with new pricing plans for acquirers that include a fixed component that the network dubs the Fixed Acquirer Network Fee, or FANF, as well as what it says is lower variable transaction costs. Visa claims that a merchant’s total acceptance costs will decline as it sends more transactions to its network. The Department of Justice is investigating Visa’s new pricing, according to a recent regulatory filing from Visa.

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Visa declined to comment about Nelms’s remarks, but instead referred to statements company president John Partridge gave June 12 at a William Blair & Co. investor conference in Chicago. There, Partridge noted that Visa informed government authorities about its pricing plan, which besides the new fixed fee and lower variable charges includes incentives for merchants and acquirers to route transactions Visa’s way.

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“Prior to those strategies being implemented in April we had several conversations with the Department of Justice,” Partridge said, according to a transcript from Visa. “We had talked to the Federal Reserve [which wrote the rules implementing the Durbin Amendment], so this wasn’t something that we just sort of sprung on the marketplace. It had been talked about and discussed over a period of time. The Department of Justice could have put an injunction on our strategies prior to the implementation in April. They didn’t do that. We are sharing data with the Department of Justice every two weeks to show in terms of what has been the impact to our business based on the Durbin Amendment.”

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Pulse, according to Discover's latest financials, posted double-digit gains in the second quarter. Transaction volume grew 13% year-over-year to 1.14 billion, and dollar volume increased 14% to $42 billion. Nelms reminded analysts that Pulse added 129 new relationships with financial institutions in 2011, but he added that many merchants and acquirers still haven’t completed their transaction-routing plans.

Riverwoods, Ill.-based Discover said its total transaction volume grew 11% from fiscal 2011’s second quarter to 1.59 billion, with dollar volume up 9% to $78.4 billion. Discover also reported at the conference call that it has entered the home-lending business and is issuing an affinity card for Ducks Unlimited.

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