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8/22/2012 4:01 PM
Pays to Discover
By Charles Payne, CEO & Principal Analyst
Have you noticed that more and more merchants aren't asking for identification or even a signature when you use your debit card? Well, we haven't become a more trusting society overnight, but the rules for making money in debit have changed dramatically, and this is how card issuers are adjusting; they're luring us into more transaction.
New regulations that cap rates on debit cards had a dramatic impact on the bottom line, with signature revenue down 55% and PIN transactions down 28%.
Signature transactions cost more to facilitate than PIN transactions, so now consumers find themselves using their cards and getting a smile and thanks instead of a receipt to sign (except in New York where you get a sneer and grunt, but still no receipt). The ease of use seems to be working. Right now 76% of Americans have debit cards, up from 73%, and in 2011 consumers spent $8,326 from $7,781 in 2010. Monthly purchases are also climbing:
> 18.3 - 2011
> 16.3 - 2010
The idea is to promote and push small purchases:
> Average ticket transaction: $38
> Median ticket transaction: $19
> transactions less than $10: 30%
All of these trends bode well for Discover Financial (DFS), which has enjoyed a strong rally from its 52-week high. The company, which is known for pioneering several things in the consumer card industry, also provides other services, including:
> Home loans
> Private student loans
> Personal loans
> Online savings accounts and banking
Despite the big move in the stock, company shares are still changing hands at low valuation ratios
> PE: 9.0
> PEG: 0.82
> PB: 2.0
This morning the stock was up on news of more innovation. Pay Pal will be using the Discover network, currently accepted at 7 million retail locations for its own payment card to be distributed to its 50 million active users. The plan rolls out next year and is a coup for both companies. As the nation moves closer to a cashless society, Discovery is poised to ring the register big time. The stock is at an all-time high but has potential to move much higher over the next few years.
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