The EMVCo Membership Will Boost Merchant Acceptance For Discover

Discover Financial (NYSE:DFS) has become the latest card processing company to join the EMV standards body, EMVCo. ^[1] The company has joined the ranks of MasterCard (NYSE:MA), Visa (NYSE:V), American Express (NYSE:AXP), JCB and UnionPay, which joined in May. All six companies are equity investors in the body and have equal interests. While this deal may not have an immediate impact on Discover, it will help it maintain compliance with the EMV Integrated Circuit Card Specifications and further gain merchant acceptance in the U.S. as well as help international expansion.

Credit cards account for 80% of Discover’s revenues and gross profits with 65% of the company’s revenue coming from interest earned on credit loans and another 15% from discount and interchange fees. The company charges an average discount and interchange fee of 1% of the dollar volume (purchase volume) of transactions processed by it.

Our $47 price estimate for Discover Financial’s stock is in-line with the current market price.

See our complete analysis of Discover Financial here

Discover is a relatively small player in the credit cards domain with just around 70 million cards in circulation. ^[2] In comparison, Visa has 278 million credit and charge cards in circulation in the U.S. ^[3] while MasterCard has 180 million. ^[4] Visa and MarterCard processes roughly 38 transactions per card annually whereas Discover processes 32. The average payment volume per transaction is around $50 for Visa and $60 for both MasterCard and Discover. ^[2]Discover’s market share in the U.S. is just around 5% of the credit purchase volume.

EMVCo is primarily concerned with setting standards for inter-operation of integrated circuit cards. Compliance with these standards will allow Discover to gain merchant acceptance in the U.S. and in international markets like Russia, where it is looking to expand its operations. ^[5] We currently expect Discover’s purchase volume to increase by 6% to 7% through the decade, mostly through organic growth in merchant acceptance and a general economic recovery in the U.S.

There is 10% upside to our price estimate should Discover maintain a double digit growth rate through the decade. You can modify the interactive chart below to assess the effect a change in forecast would have on our price estimate.

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1. Discover Financial Services : EMVCo Membership Grows with Discover [↩]
2. Visa 10K [↩] [↩]
3. Visa Operational Performance Data [↩]
4. MasterCard Q2 2013 Financial Results, Operational Performance [↩]
5. Discover Financial Services and Russian Standard Bank Announce Discover Card Issuance in Russia, Press Release, 4^th Sept, 2012 [↩]