Discover Financial Services is building its contactless payment capabilities as a segue to mobile payments.
Its contactless payment system, Zip, is gaining a larger audience, the company said in an earnings conference call Thursday. This technology is also built into stickers that are meant to be adhered to mobile phones. This introduces the concept of mobile payments to consumers in anticipation of a day when the payment chips are built directly into most handsets.
"I see nothing but growing acceptance for our Discover Zip technology. There are over 100,000 terminals out there. They are concentrated at some of the largest, most high-volume merchants," Discover Chairman and Chief Executive David W. Nelms said in an interview Thursday. "When I go to Home Depot, when I go to Best Buy, when I go to McDonald's — they all have these terminals."
Discover said its recently announced deal with the wireless carriers AT&T Inc., T-Mobile USA Inc. and Verizon Communications Inc. will play heavily in its future. Along with Barclays PLC's Barclaycard US, this group plans to support contactless payments made from mobile handsets.
Critics have said that Discover is too small a network to enable a broad rollout of the technology, but Nelms said that is not the case.
"I'm betting on a successful Isis," the CEO said, though he stressed that his company is not betting its entire future on the venture. "I am hoping it will become meaningful over time, but if you look at what we are doing in student loans; you look at the share gain that we have in our corporate credit card business … these are all very important."
In September, Discover announced that it had agreed to buy Student Loan Corp. for $600 million. SLC is majority-owned by Citigroup Inc.
Discover, which is based in Riverwoods, Ill., said it is considering providing direct mortgage and checking accounts in an effort to bolster its banking operations.
Analysts said the Federal Reserve Board's proposed rules on debit interchange, announced Thursday after Discover reported results for its fiscal fourth quarter, are a concern. The central bank said that it could cap fees at 12 cents a transaction.
"You know this is not that important to us," Nelms said prior to the announcement. "We are not a big debit issuer, so I think that, for other people, it's even more important."
"Maybe [it matters to] the banks who issue these cards," the CEO continued. "I think there is a lot of concern that if interchange is cut too much it may mean the end of free checking. So I think that … to Visa or MasterCard it may be a bigger deal than it is to us."
If anything, Nelms said, Discover views the new rules as a potential boon to business.
"We have been doing a lot of strategizing on how to best take advantage of what opportunities may present themselves, regardless of what the outcome is," he said.
Discover's net income dropped 0.8% year over year, to $349.6 million, for its fiscal fourth quarter, which ended Nov. 30.
Net revenue in the three months rose 1.3% from a year earlier, to $1.6 billion.
Discover card spending rose 6% compared with the year-earlier quarter, to $23 billion.
Sales volume for Discover's Pulse PIN-debit network rose 26.7%, to $31.3 billion, from a year earlier.
Total transactions processed on the Pulse network rose 33.2%, to 901.2 million.
Discover's share price dropped 4.13% Thursday, to $18.34.
