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Durban Exclusivity Rules To Benefit Discover Financial's PULSE Network

 March 05, 2012 01:32 PM

The new Durban rules over debit cards could benefit Discover Financial Services' (NYSE:DFS) debit/ATM network PULSE.

Under Durbin, debit cards must carry two unaffiliated networks. Hence it is mandated that other PIN debit networks such as PULSE could win some market share from Visa (NYSE:V) by adding their brands at the back of the card. In this case, "Visa" plus "Interlink" debit card would become either "Visa" plus "Maestro" or "Visa" plus "PULSE."

Discover Financial generates 2.5 percent of its revenue from PULSE. Currently, the majority of Visa's debit cards enjoy exclusivity, meaning they carry exclusively the "Visa" and "Visa Interlink" brand.

[Related -Discover Financial Services (DFS) Q4 Earnings Preview: What To Expect?]

With a base of about 4,400 financial institutions, Pulse added 129 card issuers to its network, a notable acceleration versus virtually nil in 2010. ATMs accepting PULSE increased about 30,000 to 380,000, which is estimated to represent over 85 percent of ATMs nationwide.

PULSE indicates 130 new issuers joined the Pulse network, and suggests more large request for proposals (RFPs) ahead of April 1.

"Ahead of April 1, we expect to see more issuers shift to PULSE, which could accelerate the growth of network transaction/volumes in 2H12," Susquehanna Financial analyst James Friedman wrote in a note to clients.

The analyst said while PULSE only contributes about 2.5 percent of Discover Financial's revenue, various assumptions regarding market share shift suggest the company's revenues could accelerate as much as 70 basis points (bps).

[Related -Using Discover Financial Services (DFS) To Explain How To Get The Most Out Of Trading Earnings Iestimates]

Assuming 5 percent of Visa's PIN volume would shift to PULSE, Visa's PIN transaction volume would decline to 10.1 billion from 10.6 billion, while PULSE's PIN transaction volume would increase 14 percent to 4.4 billion.

"Assuming average revenue per PULSE transaction remains $0.05 per transaction, DFS's US Debit revenue and total net revenue would increase to $205 mln and $7.09 bln from $180 mln and $7.06 bln, respectively, ~14% and 40 basis point increase," Friedman wrote.

An another scenario assumes Visa's PIN transaction volume would shift 10 percent to PULSE. Based on fiscal 2011 financials, Visa's PIN transaction volume would decline to 9.6 billion from 10.6 billion. On the other hand, PULSE's PIN transaction volume would increase 28 percent to 4.9 billion.

"Assuming average revenue per PULSE transaction remains the same ($0.05 per PIN transaction), DFS's US Debit revenue and total net revenue would increase to $230 mln and $7.12 bln from $180 mln and $7.06 bln, respectively, ~28% and 70 bps increase," the analyst added.

Late last week, Discover Financial announced a flurry of new issuers that are cobranding Pulse to comply with Durbin exclusivity rules. Discover Financial said total transaction volume on the PULSE network grew 16 percent in 2011, totaling more than 3.8 billion transactions. Total dollar volume rose 19 percent to $140 billion.

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