This story appears in the November 2009 issue of Cards&Payments.
While Discover Financial Services was riding out the recession this year, behind the scenes the company was busily hatching a plan designed to capture the next wave of global economic growth when the economy eventually turns around.
Key pieces of the plan fell into place in recent months as Discover in quick succession inked a series of card-acceptance agreements with regional ATM and point-of-sale networks in various parts of the world. The deals, related to Discover's acquisition in April last year of Diners Club International Ltd., are central to the U.S.-based company's global brand-expansion plans.
The absorption of Diners Club, the travel-and-entertainment credit and charge card brand Discover purchased from Citigroup Inc. for $165 million, added some 8 million merchant-acceptance points in more than 185 countries to the Discover Network, which processes transactions for Discover credit cards and the Pulse PIN-debit network the company acquired in 2005. The deal also affected aspects of MasterCard Worldwide's role as a Diners Club processor.
With its newest deals, Discover added ATM and point-of-sale card acceptance in India, Europe and Canada. Combined with reciprocal card-acceptance agreements Discover forged with China UnionPay in 2005 and Japan's JCB Co. in 2006, Discover dramatically has expanded the global reach of its card brands, which analysts say is an advantage in an increasingly global economy.
The recent string of global card-acceptance deals is designed primarily to boost card value and use for its mostly U.S.-based cardholders, Discover says. But some analysts suggest Discover's moves eventually could lead to card-issuing
"By expanding its brand internationally, Discover has left the door open to developing business in credit card markets not as saturated as the U.S.," says Megan Bramlette, managing associate with U.S.-based Auriemma Consulting Group.
Exactly what those business opportunities could be is anyone's guess. Discover has not signaled any plans to issue credit or debit cards to new audiences in overseas markets. Nor has it ruled anything out.
"Would we begin issuing PIN-debit cards overseas? We have not made a hard decision on that," Diane Offereins, who as Discover's executive vice president of payment services oversees the Discover, Pulse and Diners Club brands, tells Cards&Payments. "Right now we are focusing on creating a more-robust international acceptance network. ... You can only have so many priorities at one time."
Integrating the Discover, Pulse and Diners Club networks has been a front-burner priority during the past 12 months. Under its unusual structure, 49 franchisees issue Diners Club cards in different markets globally. Despite selling the brand to Discover, Citigroup remains a leading Diners Club franchisee, issuing Diners Club cards in North America, Japan and Brazil, among other markets. Unwinding certain aspects of Citi's Diners Club transaction-processing agreement with MasterCard has taken some time, the company says.
Diners Club's basic franchise structure will remain intact, but Discover is initiating some policy changes it hopes will drum up fresh interest in Diners Club among franchisees and merchant acquirers. "Diners Club has a strong brand heritage. ... We plan to invest in it and raise its profile," Rajive Chadha, Diners Club president, tells Cards&Payments (see story).
Near term, Discover's recent spate of card-acceptance moves is likely to result in greater value and utility for both Discover and Diners Club cardholders and in incremental increases in transaction volume from cardholders traveling abroad. And the nature of its mostly reciprocal card-acceptance agreements around the world, especially in Asia, means Discover is in a position to capture more transaction volume from global travelers going in all directions.
"If you consider the growth rates of China and India, and the fact that people are starting to travel more globally to and from these countries, Discover has put itself in a position to capture a lot of that transaction traffic," says Adil Moussa, an analyst with Aite Group.
Capturing such growth could be crucial to Discover's fortunes. Its card-portfolio growth in the U.S. is flat or shrinking, the economic downturn has hammered its card-spending volume over the past year, and its core income is relatively weak (see story).
Discover had another reason for racing to ink its recent series of card-acceptance deals. Citi's long-running global ATM card-acceptance deal with MasterCard's Cirrus brand for Diners Club cardholders is set to expire this year, as part of the terms of Discover's acquisition, Chadha says. Discover's Pulse subsidiary has provided the expertise and technology needed for most of the new global payment-network deals, but terms vary, Chadha says.
"In some cases, transactions abroad will be routed through Pulse's network in Houston, but not all," he says. "We are working with ATM networks and merchant acquirers based on the business model they prefer (and) that works best for all parties."
For charge card users such as those in the Diners Club franchises—and especially for corporate employees and those who travel abroad—ATM access is an important card feature, notes David Schneider, Pulse president. As a result, Discover needed to move quickly to establish ATM access for Diners Club cardholders this year.
"Dealing with the various opportunities and back-office elements of expanding global cash access for Diners Club and Discover has been a major focus around here for the last several months," Schneider says.
Through such efforts, Discover this year built a global network of some 650,000 ATMs, along with thousands of new merchant-acceptance locations accessible by both Diners Club and Discover cardholders. It was a "Herculean" task, Offereins says. More such deals are in the works, but she would not disclose which markets Discover is targeting.
The deals Discover has cut this year with global payment networks vary in type and scope. The most recent series of deals began last March, when SIX Multipay AG, a Swiss processor, agreed to acquire Diners Club and Discover transactions. In August Venture Infotek Global Pvt. Ltd., an Indian processor, also agreed to acquire Diners Club and Discover card transactions. Later that same month, Discover and Pulse announced a deal with Interac, Canada's only debit network, enabling Discover, Diners Club and Pulse cardholders to withdraw cash from a portion of Canada's 57,864 ATMs. The agreement initially will enable Diners Club cardholders to withdraw money from about 14% of Canada's ATMs.
Two more European deals came through in September, beginning with Trionis, a Belgian processor that agreed to provide Discover and Diners Club cardholders access to at least 74,000 ATMs in Europe. Trionis provides switching and processing services to banks and networks in Austria, Belgium, France, Germany, Italy, Luxembourg, Portugal, Spain, Sweden and Switzerland. It is owned by banks from nine European countries, U.S.-based processor First Data Corp. (a unit of Kohlberg Kravis Roberts & Co.) and the European Savings Banks Group.
Later in September, U.S. Bancorp's Elavon Inc. merchant-acquiring unit agreed to process Diners Club and Discover card transactions in the United Kingdom and in Western Europe beginning in the second quarter of 2010. And last month UK-based Link Interchange Network signed an agreement enabling all Diners Club cardholders to withdraw cash from its 64,000 UK-based ATMs; eventually Discover cardholders will share that access.
Discover in recent years has developed some expertise in expanding its payment network through third-party agreements instead of building its own global network merchant by merchant, Offereins says. "We look at ourselves as cooperative partners. If a network in another country wants interoperability with our network, we are happy to go that route," she says.
In 2007, Discover for the first time began to allow third-party merchant acquirers to negotiate with and sign up new merchants to accept Discover alongside Visa and MasterCard in the U.S. The effort was designed to increase acceptance at newer and small and midsize businesses through third parties, while Discover retained direct negotiations with 2,000 of its largest merchants. Discover says the effort within the last two years has brought it to within 95% of the U.S. merchant
acceptance of Visa Inc. and MasterCard.
Fittingly, Discover last year tapped Gerry Wagner as its vice president of international acceptance for Diners Club. Wagner previously led the U.S. third-party network expansion as Discover's vice president of merchant sales. "Gerry is taking the model Discover used in the U.S. to expand merchant acceptance and replicating it abroad," Chadha says.
Indeed, regional payment networks have little to lose by inking such deals with Discover, says David Lott, senior vice president at U.S.-based payment consultancy Speer & Associates Inc. "For regional payment networks like those it's signed recently, it's additional incremental revenue," he says.
Edwin Latter, Link ATM Network's managing director of its Link ATM Scheme, said in a statement that its recent deal with Discover is a "significant step" in its efforts to expand traffic on its network from worldwide travelers visiting the UK.
Other aspects of bringing Diners Club into Discover's fold have required additional work.
Under a Citigroup agreement dating back to 2004, all MasterCard merchant outlets in North America accept Diners Club cards. But with Discover's Diners Club acquisition, aspects of the Citi/MasterCard transaction-processing agreement are changing this year.
After completing a variety of technology changes, Discover Network this fall will begin to process all transactions from Diners Club cardholders outside North America, Chadha says. By yearend, all transactions from Diners Club cardholders who are visiting North America will flow through the Discover Network.
Meanwhile, transactions from cardholders based in North America, where Citi continues to own and operate the Diners Club franchise, will continue to flow through the MasterCard network for the foreseeable future, Chadha says. "In essence, Diners Club has been renting card acceptance from MasterCard in North America (for cardholders based abroad), and now we will handle those transactions through our own network," Chadha says.
The amount of volume Discover Network is likely to add from the recent shift from MasterCard's network is likely to be "incremental," Chadha says, noting the new arrangement is "financially more attractive" for Discover.
Discover deserves acclaim for the speed and efficiency of its recent spate of global card-acceptance deals, which they deem both strategic and frugal, analysts say. "It has all been low-risk and relatively low-cost," Auriemma's Bramlette says.
Discover's long-term global ambitions remain to be seen. But near term the company has succeeded in piecing together an international card network through cooperative agreements that have greatly increased cardholder value for Discover and Diners Club cards.
When the economy rebounds and corporate and general travel resumes, Discover will be well positioned to capture more transaction growth. CP