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ARLINGTON, Va. – Over 1,000 credit unions will get the chance to issue Discover cards if they and the other member owners of the PULSE EFT association agree to Discover Financial Services’ offer to buy the Houston-based network. The management of PULSE EFT Association and Discover Financial Services announced the merger agreement last week. Pending the approval of PULSE’s bank and credit union members, the only ATM network owned by both banks and credit unions will become part of the business unit of Morgan Stanley for $311 million and other strategic value. “We believe the combination of the PULSE and Discover networks will create a leading electronic payments company offering a full range of products and services that will represent an attractive choice for financial institutions, merchants and consumers,” said David Nelms, CEO of Discover Financial Services. “Together, we intend to be a robust competitor in the important and rapidly growing debit market.” “In a rapidly changing environment, PULSE’s board has elected to team with a company that has a suite of products and resources that will enable us to continue our growth and success,” said Stan Paur, PULSE CEO. “We believe that PULSE’s experience in debit, combined with Discover’s signature capabilities, will create a highly appealing alternative for small to large institutions across the country.” Should it go forward, the deal will offer numerous benefits to Discover as well as to PULSE’s bank and credit union members in both the short and longer terms. In the short term, the credit unions could stand to make some good money. While the details of how the sale proceeds would be distributed will be revealed in an upcoming financial statement about the deal, the over 1,000 credit unions could have a share in as much as $100 million. PULSE has 4,100 bank and credit union members and Paur said that roughly a third of these are credit unions For Discover, in the short term, the business unit of Morgan Stanley would get access to the third largest ATM and online debit network. “It’s no secret that this is a part of the puzzle we have never had,” said Nelms. “The addition of PULSE will enable us to offer a full suite of card products to financial institutions right away,” Nelms said. Paur said that PULSE staff would conduct information sessions for member institutions around the country over the next 60 days. Another Card Brand In the longer term, credit unions who choose to do so will benefit from being able to offer their members a third debit and credit card brand. In October, the Supreme Court let a lower court ruling stand which struck down Visa and MasterCard’s policies which excluded financial institutions from issuing cards other than Visa and MasterCard. Previously, those policies precluded credit unions which issued Visa or MasterCard from issuing Discover cards and both American Express and Discover have been quick to draw up a strategy for enticing new financial institution issuers. “This strategic partnership will join the forces of PULSE and its 4,100 member banks, credit unions and savings institutions with Discover Network and its more than four million merchant and cash access locations,” Nelms said. “The combined entity will provide financial institutions of every size and type with a full-service debit platform and a complete product set, including credit, signature debit, PIN debit, gift card, stored value card and ATM services.” Many of the details of the relationship between the credit unions and Discover remain up in the air, Nelms, reported, for the simple reason that the card brand has never had financial institution issuers before. “We will be communicating the additional details in the coming weeks, should this offer proceed to completion,” Nelms said. Nelms explained the pricing of the cards, as well as the decision whether or not to participate in the 1% cash back rebate program that has become a cornerstone of the brand will remain up to the credit union issuers. Discover will make money from additional transaction interchange from purchases on its network and it is not clear whether Discover will impose a branding fee for its credit cards. Discover brings the credit unions access to over four million merchant locations around the country, which is more than American Express but less than Visa or MasterCard. However, from the merchant perspective, Discover charges significantly less interchange which makes the brand popular with merchants. “In sum the board of directors, which include credit unions, felt this offer provides our members a strong opportunity to improve their overall card strategy and situation,” said Paur, implying that the PULSE board would not have been as likely to have accepted the deal just for the cash. Nelms refrained from speaking too specifically about Discover’s strategy in the overall card market, but suggested that Discover thought that financial institutions, particularly smaller ones like credit unions and community banks, would like a chance to offer a card brand other than Visa, MasterCard or American Express. Nelms also explained that Discover would benefit from leaving the PULSE organization substantially in place, from the management on down. Paur will remain CEO of PULSE as well as executive vice president in charge of Discover’s PULSE division which will remain headquartered in Houston. In essence, Paur explained, PULSE will become the equivalent for Discover that Interlink or Maestro are for Visa and MasterCard, independent ATM and online debit networks, with the addition that Discover gains a pool of potential new Discover card issuers. A Skeptic Speaks Bob Hackney, president of Card Services For Credit Unions, the association of credit unions, mostly Visa issuers, who process their card transactions with Certegy, expressed some doubts about the impact of the merger. He pointed out that even if all of Discover’s four million merchant and cash locations were solely merchant locations; they would still pale beside Visa and MasterCard’s 12 million American merchant locations and roughly 275,000 ATMs. “The only way to build market share is to have the weight you need in advertising and marketing to build your brand,” he noted, “and I don’t think Discover has that weight.” This is crucial because Hackney believes it is going take a pretty strong incentive for a credit union to devote resources to a third card portfolio, especially at a time when many are wrestling with devoting sufficient resources to managing their Visa and MasterCard portfolios. He also wondered how many consumers might be left who really want either a Discover or American Express card since nothing has prevented consumers from approaching either company directly. If there is a down side to the deal it may be found in the hole that PULSE’s departure as an independent ATM network may leave. Currently PULSE is the only ATM and EFT network which both banks and credit unions own. Credit union executives sit on the PULSE board and over the years PULSE has been uniquely situated to speak to card and ATM issues which interest both banks and credit unions without the usual competitive wrangling. When a fight arose over whether banks and credit unions should be allowed to surcharge foreign cardholders at ATMs, for example, PULSE took the lead in speaking for its member banks and credit unions in favor of the ability to surcharge. Paur has also recently mounted an initiative to try to get banks and credit unions to cooperate more on payments issues which, Paur maintains, both types of financial institutions neglect. Paur said he expected that PULSE would try to continue that facilitator role, but that its impact may not be the same as a division of Discover Financial Services. -

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