The card business is changing, and two recent developments illustrate just how rapidly and dramatically that transformation is occurring. The November announcement that Discover Financial Services (Riverwoods, Ill.), issuer of the Discover card, would acquire the Houston-based Pulse EFT Association for approximately $311 million signifies not only the rise of debit but also the (re)emergence of competition to Visa and MasterCard's dominance.
In another sign of how competitive things are, American Express announced that Citibank would issue credit cards in the U.S. that will be accepted on the American Express global merchant network. Citibank will be responsible for issuing the cards, managing the customer relationships, providing service, billing and credit management, and designing the card product features. American Express will process transactions on its network.
The Discover/Pulse merger also will broaden the card options available to merchants and consumers. The combined organization will offer financial institutions "a full-service debit platform and a complete product set, including credit, signature debit, PIN debit, gift card, stored value card and ATM services," Discover's chairman and CEO David W. Nelms said in an official statement.
The growing appeal of debit is key to the deal, according to Theodore Iacobuzio, vice president of research with TowerGroup (Needham, Mass.). "Credit is cooling off," he says. Through most of the 1990s up until about two years ago, card use essentially was focused on "the lending function. People were borrowing and fueling a big business. The market matured. The figures are unambiguous: There are six-plus cards per household. That's a mature market, with that many choices in credit."
Iacobuzio continues: "While all this is going on, here comes a new product called debit that people love to use. It is stealing the sweet spot of lower-end credit card $25-$50 [transactions]."
Furthermore, "The old association/EFT network/bank structure is blurring around the edges." Previously, Iacobuzio explains, "Either you offered signature-based debit on a Visa or MasterCard platform, or PIN-based debit on a local EFT platform. Today, there are more choices for bankers, and if there are more choices, the bank is in better shape. You used to have to go to either MasterCard or Visa. Now, this is a third brand out there. Competition is not a bad thing."
So, does the Discover/Pulse deal stand to hurt or help banks? According to Iacobuzio, "If you are a credit card issuer, it could be a negative. But it's also a positive because it is making the pie bigger and is enabling plastic to pay for things it couldn't before."
In a way, Iacobuzio suggests, Discover and Pulse may actually have gotten a jump on the newly enabled American Express. "It shows creative thinking [and] kind of fooled everyone," he says.
The deal "is a win-win for everyone," Iacobuzio declares. Among the advantages of the new combination, he continues, is that "Discover is a fantastic franchise. They have a brand name, which is almost non-existent in bank cards."
AT A GLANCE
PULSE EFT Association (Houston):
- 4,100 member financial institutions.
- Accessible by more than 90 million cardholders.
- Nearly 250,000 ATMs and more than 3.3 million POS terminals at retail locations.
Discover Financial Services
(Riverwoods, Ill.; a business unit of Morgan Stanley):
- Operates Discover Card and Discover Network.
- More than 50 million cardmembers.
- More than 4 million merchant and cash access locations.