ORLANDO - The chief executive of Discover Financial Services Inc., which has been overshadowed by American Express Co. in the contest to win over Visa and MasterCard member banks, gave his first major sales pitch Thursday.
At the 16th annual Card Forum and Expo, David W. Nelms declared the Morgan Stanley card unit "open for business," and cast its Novus network as the most merchant-friendly one. In an age of merchant empowerment to direct payment card rates and policies, what is popular among retailers should be pushed by banks, he said.
The forum, sponsored by Thomson Media, which owns American Banker, was the first time Mr. Nelms has spoken extensively about the advantage of Novus for issuers, who - in all likelihood - will be able to start issuing rival cards to Visa and MasterCard this year.
Discover, of Riverwoods, Ill., put out a press release Thursday inviting banks to join its network. And it scheduled a party for card issuers at the conference in Orlando.
American Express has already signed up an issuer, the No. 2-ranked MBNA Corp. But Discover, which observers have said is a smaller threat to Visa U.S.A. and MasterCard International than Amex, has had little news.
Discover did not announce any bank partnerships at the conference, but Mr. Nelms tried to capitalize on retailers' current clout. He painted a picture of merchants' growing discontent with Visa and MasterCard. And by portraying Discover's low merchant rates as an advantage, he implicitly recast Amex's higher fees as a disadvantage.
He emphasized merchant concerns over rate hikes from Visa and MasterCard. Retailers have become emboldened over the issue since winning debit card rate reductions, policy changes, and $3 billion from Visa and MasterCard in class-action settlements a year ago.
Merchants pay around $20 billion annually to accept Visa and MasterCard, up 119% from eight years ago, Mr. Nelms said. "I think something will give, and ultimately what will give is acceptance." (Both Visa and MasterCard say that has not happened.)
"The associations are trying to do some damage control," he said. Wal-Mart Stores Inc.'s rate agreement with Visa may be one example of that, he said. But other merchants are still unhappy with the rates they pay, especially smaller retailers, who feel they are at a disadvantage compared to the retail giants.
Mr. Nelms said Discover and the banks that issue over its network will benefit from merchants' anger. "As the lowest-price network, with an attractive cost structure, we expect to continue to sign hundreds of thousands of merchant outlets every year, and to add more and more places that exclusively accept credit cards on Discover's network," he said.
Novus is catching up with Visa and MasterCard, he said - each claims 5.2 million merchants in the United States, compared to Novus' 4.9 million.
Notably, the emphasis in Discover's bank pitch is on the strength of its network, while Amex emphasizes its brand power.
Mr. Nelms also highlighted Discover's proposed lower fees for banks. "As an issuer on the Discover-Novus network, you will not subsidize noncredit-card products, other banks, international expenses, unnecessary sponsorships, affinity-cobrand payments, lots of overhead, or legal expenses," he said, in an obvious dig at the service fees charged by Visa and MasterCard, which operate as joint ventures with member banks.
Though Mr. Nelms said he was interested in reaching issuers of all sizes, his remarks seemed geared toward small issuers, who may feel they get little benefit from companies run by big issuers. Discover is offering small banks "a big opportunity," he said. "The associations are really catering to big banks."
Over the past several quarters Discover has lost customers and receivables as it has focused on building credit quality, Mr. Nelms said. Card accounts at the end of the first quarter fell 1% from a year earlier, at 45.9 million. Managed receivables fell 9%, to $47.3 billion. Mr. Nelms said that the drops were temporary, and that 40% of U.S. households had a Discover card.
Issuers that link up with Discover will probably not move their entire portfolios, he said. Some may cross-sell Discover cards to their current card base or offer Discover cards to those who have turned down a Visa or MasterCard. "It will be test and learn."
Two executives from First National Bank of Marin, a Las Vegas issuer of 700,000 Visa card accounts, most of them subprime, said it may add Discover to its product line.
Katherine Kaplan, an assistant vice president of marketing for the bank, said it probably would not convert its entire portfolio to Discover.
Another assistant vice president, Chris Gouveia, said, "We can't predict acceptance" of Discover cards, "but it will be interesting to see if consumers really care" which card they are getting.
