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Credit Card Applications » News » Other » Discover Can Boost its Profitability Through its Network

Discover Can Boost its Profitability Through its Network

September 23, 2010
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Although widely known as a credit card issuer, Discover Financial Services also has a business of transaction processing that can give the company`s profit a big boost according to many analysts. Although the Discover network is smaller compared to that of MasterCard or Visa, Discover could increase the profitability by working with other telecom companies and devising a strategy to process the payments through the customers` mobile phones. The credit card lender could also choose the option to sell its unit for transaction processing which will give more than a billion dollars worth of value to the company. The company`s current market value according to analysts is estimated at 8 billion dollars.

However, the chief executive of the company told Reuters that he has no intentions of selling the processing business. CEO, David Nelms, in an interview revealed that Discover`s network is growingly becoming more valuable to the company as well as its shareholders. The strategy followed by Nelms is very similar to that of American Express Co. which in the same way as Discover lends loans on credit cards and processes transactions. Much of the growth of American Express in the future is expected to come from processing of transactions. This is considered to be of much lesser risk than lending.

MasterCard and Visa which are networks for transaction processing make their money by sending information from a consumer`s bank to the merchant`s bank. The partners of the banks and the networks receive 2% of the purchase amount in the form of processing fee every time a consumer swipes the debit or the credit card. According to analysts the number of merchants who accept Discover cards and take processing fees for the company is similar to that of the American Express. However, American Express is said to have far more high end merchants than Discover which leads to lesser processing fees received by Discover. That is the reason the network of Discover is not assigned much value by most analysts. Currently, the shares of Capital One are trading at 9 times the estimated earnings while that of Discover are trading at 8 times the estimated earnings. Discover, however, is accepted at less number of high end merchants compared to American Express.

Even after 3 years of operations as an independent company spun off by Morgan Stanley, Discover is poorly understood by investors. According to analysts, Capital One gets a greater earning than Discover, even though the former doesn`t have a payment network.

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