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Yesterday, Discover Financial Services (DFS - Analyst Report) announced an affiliation with Birmingham-based Cadence Bank to launch the new Cadence Bank Debit Card. Through this alliance, Discover Debit will provide network support to the new debit card, which will be issued to all Cadence debit card holders in the second quarter of the year.

The alliance is a result of Cadence’s comprehensive evaluation of its debit options, which revealed that an affiliation with Discover would be the most beneficial for the bank. The evaluation was conducted considering the changing scenario in the financial services segment. There is a visible shift in the utilization of traditional payment options due to the changing needs of consumers.

Thus, in order to make transfer, management and spending of money easier, Cadence decided to improve its signature debit program. The bank believes that the alliance with Discover will help in offering appropriate solutions to its card members. Moreover, Discover is offering an attractive interchange rate structure and lower network fees, which is expected to enhance the bank’s profits.

Further, with this alliance, Cadence card holders will get access to over 8.5 million merchant locations in the U.S. Moreover, participation in the PULSE Loyalty Edge program is expected to boost spending at individual merchant locations by offering loyalty rewards to card holders. This in turn will help strengthen local commercial-client relationships, which will be beneficial for all the parties.

Cadence’s faith in Discover, despite the presence of larger players in the market, shows the company’s growing clout in the market. The company is benefiting by offering flexibility and superior value proposition to clients in an industry that traditionally offers entrenched business models.

Discover Debit not only offers an extensive coverage in the U.S. along with security and convenience, but also provides efficient fraud-prevention and data-security tools. This reduces the risk of debit card fraud for card holders.

The alliance is expected to boost the transaction volume in Discover’s PULSE network, which manages Discover Debit. This in turn will boost the revenues of Discover’s Payment Services segment. The segment has already been witnessing substantial growth over the past few quarters, primarily due to an increase in point-of-sale transactions on the PULSE network.

Discover currently carries a Zacks Rank #3 (Hold). We maintain a long-term Neutral recommendation on the stock. Peers in the card industry – Visa Inc. (V - Analyst Report) and MasterCard Incorporated (MA - Analyst Report) carry a Zacks Rank #2 (Buy).

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