Discover Makes Progressive Advances

Discover Financial Services (DFS - Analyst Report) recently announced that it has decided to implement a 2013 EMV chip mandate for acquirers and direct-connect merchants in the U.S., Canada and Mexico. The company has also extended its ties with Diners Club Ecuador (DCE) through its franchise agreement with the latter to introduce the issuance of Discover cards in the Republic of Ecuador.

Firstly, such deployment efforts towards an EMV chip technology shows that Discover is desirous of providing a smooth and secure transition to its customers, thereby offering flexibility with regard to payment solutions offered to them. The company also avers that its activity shall not pose any hindrances to any authentication, verification or transaction channels, on the contrary, it would be totally voluntary.

It is interesting to note that the company has been engaging in EMV payment solution deployment activities since the last three years. Not long ago, Discover implemented its first U.S. EMV embedded card solutions at Wal-Mart Stores Inc. (WMT - Analyst Report) in January 2012.

Now, coming to the Ecuador expansion agreement, this would be quite a momentous venture for Discover as it marks the issuance of Discover cards at shores beyond the U.S. for the first time. As per this agreement, Discover will sub-license its cards’ issuing rights to the largest private bank of Ecuador, Banco Pichincha.

This new Discover card to be issued at Ecuador shall start with featuring its CashBack Bonus program for the time being, however, other advanced products are expected to enter the Ecuador market after domestic users familiarize themselves with its basic one. The company is perspicacious of making extensive global market proliferation using DCE’s far-reaching goodwill and infallible merchant acceptance at Ecuador.

Discover appears to be solicitous not only of making technological advancements to escalate industry standards but also caters to increasing its international market share targeting new geographic regions. Such moves are approbatory as it marks pervasive advances strategically made by a progressively inclined management.

However, the company should remain chary of a few big names in the industry. Credit Acceptance Corp. (CACC - Snapshot Report) recently reported financial results of its December quarter of 2011, whereby it recorded a 10.5% annual increase in net income to reach $188 million in 2011. Other worthy industry opponents for Discover includes SLM Corp. (SLM - Analyst Report) and First Marblehead Corp. (FMD).

We continue to maintain an Outperform recommendation on Discover. Our view is supported with a Zacks #1 Rank on the stock which translates into a short-term rating of ‘Strong Buy’.