Discover Financial Services (NYSE:DFS) has seen strong growth in the number of transactions over its PULSE network in 2011. Total transaction volume on the network grew to 3.8 billion in 2011, an increase of about 16% compared to 2010. The company also added 129 direct financial institution participants to its network and increased the acceptance of PULSE to more than 380,000 ATMs in the U.S. in 2011 from 350,000 in 2010.  Discover operates the fourth largest payments network in the U.S. after Visa (NYSE:V), MasterCard (NYSE:MA) and American Express (NYSE:AXP).
Visa and MasterCard, which dominate the payments processing industry, together control more than 90% of the transaction processing market. Discover is relatively a new entrant in the market and started processing debit and ATM cards after it acquired PULSE in 2005. The company still derives more than 50% of its value by extending credit to credit card customers and earnings a net interest income on card loans. Transaction processing constitutes less than 5% of the Trefis price estimate of Discover’s stock price.
Although small, there has been significant demand growth from both large and small financial institutions to add the PULSE network to comply with the Federal Reserve’s prohibition on network exclusivity arrangements. The total dollar volumes of transactions on the PULSE network grew to $140 billion in 2011, an increase of 19% over 2010. PULSE’s national reach, customer service, and reliable ATM and point-of-sale (POS) switching and settlement services help it attract and retain customers.
We expect transactions over the PULSE network to grow from 3.8 billion in 2011 to more than 8 billion by the end of our forecast period.
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We have a price estimate of $25.98 on Discover’s stock, about 15% below its current market price.Notes:
- PULSE Adds Issuers to Network, Expands ATM Coverage in 2011, Feb 29, 2012, Press Release [↩]