[IMGCAP(1)]Now that Discover Financial Services and American Express Co. have begun working with third-party merchant acquirers, stark differences are emerging between the two card companies' strategies for expanding acceptance.
Analysts said the paths Discover and Amex are taking underscore their diverging business models and long-term goals.
Discover has used its new arrangements to maximize the number of merchants that take its cards, trying to close the gap with Visa Inc. and MasterCard Inc. Analysts said this gap has hurt Discover's revenue growth, so broader card acceptance has become central to Discover's survival and its plan to become a global brand.
Amex, by contrast, appears to be placing a lower priority on getting card acceptance in every retail nook and cranny.
"Discover's success so far in expanding merchant locations is worth noting, while Amex's progress is less clear," said Scott Strumello, an associate at Auriemma Consulting Group. "It appears that Discover wants to be accepted everywhere and Amex is still choosing its merchant locations more carefully."
In recent years Discover and Amex each signed agreements with a variety of merchant processors to enable card acceptance for the first time alongside Visa- and MasterCard-branded cards as part of an integrated acceptance service. Most of the two companies' new agreements went live late last year after months of back-office work to integrate the systems.
Discover gave third-party acquirers control of the merchant relationships, including owning the contract and setting its own transaction-processing price. By contrast, Amex has retained control over merchant contracts and card-transaction pricing in its third-party acquirer agreements. When merchants accept Amex in an integrated arrangement alongside Visa, MasterCard, and Discover, they must negotiate separately with Amex on contracts and transaction pricing.
Since signing its first integrated card-acceptance deal, with First Data Corp., in mid-2006, Discover, the No. 4 card network in terms of volume, said it has signed 88 agreements with third-party acquirers, including the nation's 10 largest. With most of these agreements kicking in during the second half of 2008, Discover said it now shares 98% of the potential acceptance points of both Visa and MasterCard, up from 77% in 2005.
Discover said that, through the final months of last year, it was signing up an average of 6,000 merchants per day.
Giving acquirers control over Discover's transaction pricing is a powerful incentive for third-party operators to promote Discover acceptance, said Matt Johanson, its vice president of acquirer relations. "Acquirers can earn the same type of margins selling Discover card acceptance as they do selling Visa and MasterCard acceptance," he said, noting that Discover retains direct relationships with a core group of large, national merchants.
Merchant acquirers applaud Discover's approach.
"Customers love it," said Debra Rossi, the general manager at Wells Fargo & Co.'s merchant payment solutions division. "The former approach was very awkward because we couldn't provide merchants with a discount rate for Discover or help with customer-service problems. Under the agreement we signed last year with Discover, merchants don't need to make any special effort to accept Discover."
Amex has talked with Wells about an integrated-services acceptance agreement, but the two companies have not come to terms, Ms. Rossi said. "When customers want to offer Amex, we tell them to get in touch with Amex about their fee and their contract," she said. "It's a very fragmented arrangement."
Amex would not discuss its progress in gaining integrated card acceptance through the new arrangements, but analysts said it is sluggish.
Bryan O'Malley, Amex's vice president for small-merchant acquisition, said that it is too early to report the results of its new third-party agreements but that the overall response is positive.
"Smaller merchants say it is a terrific value to have Amex folded into their bank card-servicing agreements," he said, declining to discuss pricing specifics. "Typically, we set the transaction rate for a particular merchant, and that rate is built into a single, integrated fee paid to the processor."
Despite Discover's claim of rapid expansion of its card-acceptance base, it is difficult to measure card-network merchant penetration accurately because the data is inconsistent, Auriemma's Mr. Strumello said.
"A merchant may be classified as an outlet, a terminal, or a single merchant identification number," he said, "and many of the numbers, including from Visa and MasterCard merchants, are dubious."
But many observers said Discover is on track to reach near parity with Visa and MasterCard next year as all its agreements go live and more sales agents push the integrated-service approach.
Amex probably will not release control of its own contracts and pricing anytime soon, analysts said. The company continues to walk a tricky line by touting broad acceptance while supporting the perception that Amex's more upscale cardholders drive higher average ticket sales, justifying its higher merchant discount rate.