Discover Financial Services, whose card-issuing business has held up well in this recession compared to its rivals', is now also trying to make its weaker network business a contender.

The Riverwoods, Ill., card company has suffered relatively low credit losses and few cardholder defections, thanks to what executives and observers describe as a low-risk and "consumer-friendly" customer-acquisition strategy. But the recession is retarding Discover's efforts to win more business to its third-party network, which is still tiny in comparison to those of Visa Inc., MasterCard Inc., and American Express Co.

Discover has spent recent years building up its network infrastructure: Since 2006 it has signed deals with merchant acquirers to close the acceptance gap in the United States. Last year it bought the Diners Club International network to establish an international presence.

In December, Discover consolidated those two credit networks with the Pulse Network LLC debit unit in a payments services division and promoted Diane E. Offereins, the head of Pulse and its chief technology officer, to executive vice president of the new division.

Now Ms. Offereins is mobilizing the beefed-up network infrastructure to win more business from banks.

"Disruption happens all the time. Every once in a while someone comes along and shakes you up, and we want to be that one," she said in an interview last week. "We've got the resources, and we're committed to investing in it, and we just need a little time."

Volumes on Discover's network still lag far behind the competition. Total volumes in the quarter ended Nov. 30 reached $56.9 billion, including $7.4 billion from Diners Club and $25 billion from Pulse; volume from third-party credit card issuers who used the Discover network accounted for only $1.5 billion. Amex, by contrast, reported billed business of $160.5 billion (including cash advances) on its network, for both its own cards and those issued by other financial institutions. Not including cash volumes, Visa reported worldwide volumes of $701 billion in the quarter ended Sept. 30, and MasterCard reported volumes of $455 billion in the fourth quarter.

Ms. Offereins acknowledged that Discover cannot match powerhouses like Visa and MasterCard in scale but said it hopes to attract issuer business with greater flexibility.

"They're big, there's no doubt about that, and they're well-established, and I think growth is always a challenge, but we're not trying to be them," she said. "We're open to all sorts of ideas. … We're very flexible in terms of the way we want to work with our partners."

But observers said flexibility can only go so far in a recessionary period when financial institutions are looking for ways to retrench rather than innovate.

"Product people love the flexibility of Discover. The problem is how they get the mindshare of a senior card executive" right now, said Philip J. Philliou, a former executive at MasterCard and Amex and a partner in the Philliou Selwanes Partners LLC consulting firm in New York. "Every credit card issuer is locked down right now, and it's very difficult for them to do any experimentation."

Sanjay Sakhrani, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said that, especially in a climate of increasing consolidation among debit card issuers, "the question remains whether or not the large bank card issuers are willing to branch out. It seems like a lot of the large banks have stuck with the one solution." Some industry players have told him "they've definitely found other [Discover] products interesting, but I'm not sure they're willing to push the button," he said.

The economy is creating "a longer sales cycle, especially on the credit-issuing side," Ms. Offereins said, and both financial institutions and "nontraditional" payments companies, including retailers and mobile phone providers, have expressed interest in using the Discover network. It has renewed all the Diners Club issuers abroad whose contracts have expired since Discover bought the network in July — but few U.S. issuers have signed on to the Discover credit card network since 2005, when General Electric Co.'s consumer finance unit and Metris Cos. Inc. did so. (Metris is now a part of HSBC Holdings PLC.)

James Ellman, the president of the hedge fund Seacliff Capital LLC and a longtime vocal proponent of Discover's either shutting down or selling its network business, takes an even dimmer view of the unit these days. The network is "worth significantly less than had they sold it a year ago or two years ago," when more issuers would have been able to bid on it and drive up the price, he said. Now "it could be acquired by one of the big banks for, instead of a very large price, a very small price."

But most observers, who questioned the ability of most banks to make such a purchase now, said they see potential advantages for Discover in keeping the network and the issuing business tied together. Despite the inhibition of experimentation, "issuers are increasingly looking to diversify from their reliance on one specific network, particularly when that entity is a public company. It helps them reduce their reliance on just one brand," Mr. Sakhrani said. And for Discover, "there are strategic advantages in being a closed-loop network and having a product on that side of the business and then branching out into the network as well, and those would be lost if you separate the two."

Eric Grover, a former Visa executive and the principal of the consulting firm Intrepid Ventures in Menlo Park, Calif., said that Discover's network, not the issuing side of the company, has the most potential to drive long-term growth.

"They've been doing a lot of right things on the issuing side," he said, but this business, with "a spend-per-cardholder that has traditionally been a bit lower than [that of] a Visa or MasterCard cardholder," is unlikely to increase Discover's market valuation. "If you can demonstrate that the network is viable over time, that's where you can boost the enterprise value of Discover."

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry