iscover Financial Services wants a larger piece of the bankcard pie. One year after purchasing PULSE EFT Association's ATM/POS network, the company has unveiled a new debit card. Discover hopes financial institutions will take to it as an alternative or addition to Visa U.S.A.'s and MasterCard International's debit products.

At least one bank has agreed already to issue the new card, called Discover Debit. The bank, Central National Bank & Trust Co. of Enid, Okla., is also in the correspondent banking business; it provides processing services for numerous community banks. The bank's processing unit is one of several card processors that have signed on to support Discover Debit, according to Discover.

David Schneider, PULSE's Executive Vice President and Chief Corporate Development Officer, expects Discover Debit to attract plenty of additional issuers from the ranks of community banks and credit unions that believe they are disenfranchised by Visa and MasterCard. He also expects ISOs and acquirers to benefit from the company's foray into debit. "We see it as another product suite ISOs can offer," he said.

Schneider's remarks echoed the message presented by Discover at the Northeast Acquirers' Association winter confab in early February 2005. "Our partnerships with external sales agents have never been more important," said Bob Kinsella, Relationship Manager for Indirect Merchant Sales at Discover.

After years of selling through an internal sales force, Kinsella said, "The focus is on strengthening external agent relationships."

Banking on PULSE

Discover Debit is the first new debit card introduced in the United States since a 2004 court ruling forced Visa and MasterCard to scrap their rules prohibiting member banks from issuing nonbank payment cards (such as those from Discover or American Express Co.).

The product builds on Discover's existing card network and PULSE's EFT switch, which links to thousands of financial institutions (and consumer checking accounts) nationwide.

A transaction initiated with a Discover Debit card will be routed initially through the Discover Network using the same POS equipment merchants have today.

Discover will then hand off the transaction to PULSE, which, in turn, will deliver it to the issuing bank where funds will be debited from the cardholders' demand deposit account (DDA).

Discover Debit is an idea whose time has come, and it's consistent with what analysts predicted when Discover purchased PULSE. It bears a vague resemblance to Visa's POS Check product, but it's not an electronic check service.

Although Discover Debit clears through PULSE, Schneider said financial institutions that issue the new debit cards are not required to be members of the PULSE network.

Here's how Stan Paur, PULSE's President and Chief Executive Officer, described Discover Debit: "The combination of PULSE's debit experience and Discover's signature capabilities has enabled us to create a compelling new choice for financial institutions, merchants and consumers in the important and rapidly growing debit market."

Paur knows debit. He is largely credited with building PULSE from an EFT switch based in Texas (originally, just an ATM network) to a national network and a powerful weapon in Discover's campaign for bankcard market share. Paur will become PULSE Chairman at the end of March 2006. Schneider will succeed him as President and CEO of the network.

A press release announcing the management shift stated that the change would allow Paur more time to develop relationships with financial institutions and potential business partners. Discover said PULSE (which switches EFT card payments for more than 4,000 financial institutions) would remain an independent unit of Discover.

From his 20-plus years running PULSE, Paur has plenty of experience working with banks and promoting debit cards. Before being purchased by Discover, PULSE was the largest bank-owned EFT switch, and it had remained bank-owned even after most other regional networks had not. It was also one of the first EFT switches to get large numbers of merchants to accept PIN debit - 20 years ago.

Discover a new alternative

The aim of Discover Debit, Schneider said, is not to eliminate MasterCard and Visa check cards from Americans' wallets but to provide financial institutions with additional debit payment options to offer customers.

For example, a bank could segment DDA customers, offering some consumers Visa and MasterCard check cards and others Discover Debit. "Financial institutions now have a choice," Schneider said.

Discover Debit cards can be issued either as online (PIN-based) or offline (signature-based) debit cards.

"We're going to be flexible and allow financial institutions to decide whether, to what extent and to whom they want to offer signature debit," Schneider said.

Although he declined to quote specific fees, Schneider insisted that Discover Debit would undercut Visa and MasterCard pricing.

As is the case with Discover credit cards, all Discover Debit card payments are authorized online, all the time. That cuts down on risk and the potential for fraud all the way around, for issuer, acquirer and merchant, Schneider said.

Discover Debit supports rewards programs.

Discover Debit seems to be well positioned as an alternative to the status quo.

It was just 20 years ago that Discover first burst upon the scene as the brainchild of Sears Roebuck & Co. Eventually, Sears got out of the card business, but Discover continued, and it is now a unit of investment banking giant Morgan Stanley.

At year-end 2005, Discover reported having 50 million card members, all with cards issued by Discover that could be used at 3.2 million merchant terminals and 250,000 ATMs. Federally-insured financial institutions must issue Discover Debit cards.

So what's next for Discover? Prepaid and stored value cards. "We think there are particular applications that are well suited to Discover," Schneider said.

Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com .