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Discover Debit Card Challenges Visa and MasterCard

By Martin H. Bosworth
ConsumerAffairs.com

February 16, 2006
Two recent actions involving the Discover Financial Services company have positioned it to challenge Visa and MasterCard for dominance in the multibillion-dollar credit and debit card market, and have raised the stakes in the battle between banks, merchants, and consumers over the hidden fees involved in using plastic for purchases.

Discover announced that it was introducing Discover Debit, its own debit card brand, to compete with Visa and MasterCard's debit offerings and increase its profile as a full-service payment company.

In a statement announcing the venture on Feb. 13th, Discover CEO David W. Nelms touted the move as "a highly appealing alternative for financial institutions, merchants and consumers."

"The launch of Discover Debit builds on this with a new, uncomplicated approach to signature debit that provides convenience and broad acceptance to cardholders," said Nelms, "as well as security and competitive program features to financial institutions."

Discover touted its new card as offering more attractive features than the competition, including zero liability in case of fraud, clear pricing and billing rules, and better security.

Most attractive to merchants, however, was Discover's announcement that it would be dropping its "No Surcharge" rule when processing merchant transactions.

The "No Surcharge" rule prevented merchants from passing the costs of card transactions on to consumers via tacking on extra fees.

Merchants, in turn, have to pay higher "interchange" fees when processing card transactions, and end up making less money than when customers pay cash.

Discover Financial agreed to drop its "No Surcharge" rule in negotiations over a merchant-backed class action suit against the rule, and was dropped from the suit.

Leveling the Playing Field

Discover's actions are a direct challenge to Visa and MasterCard's dominance in the credit and debit market, coming at a time of increasing consumer awareness of the "hidden fees" they pay to use credit and debit cards.

The "No Surcharge" class action suit is being combined with a separate class action suit challenging Visa and MasterCard's control of interchange fees for merchants.

Photo shop owner Mitch Goldstone is one of the principal litigants in the interchange fee lawsuit. He hailed Discover's dropping of the "No Surcharge" rule as a smart move, and predicted that "Discover Financial is poised to garner substantial support from merchants and consumers."

Goldstone has repeatedly targeted Visa and MasterCard for what he has called "illegal price fixing," through setting excessive processing fees that merchants have to pay when customers use plastic instead of cash.

"While Visa and MasterCard have their heads in the sand, Discover made a brilliant marketing coup which is getting noticed by retailers and cardholders, " Goldstone said.

Discover Financial is owned by New York-based securities and investment firm Morgan Stanley. The firm recently agreed to pay $15 million as part of a settlement with the Securities & Exchange Commission (SEC) for failing to retain e-mail records of its activities.

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