What do you do if youre a struggling second-tier credit card company and your main advantage is offering lower prices to retailers? One approach is to position yourself as more convenient and more modern than your competitors and to focus on places that your rivals dont dominate.
Thats a big part of the strategy behind Discover Financial Services Inc.s sudden embrace of biometric technology, according to CIO Diane Offereins.
Discover this week announced a deal with Pay By Touch, a San Francisco-based biometric payment vendor, to actively support their systems. The Pay By Touch system allows consumers to scan a finger instead of swiping a credit card.
With many privacy concerns being voiced today against the background of additional terrorism-oriented security, Offereins stressed that no fingerprints are actually being captured by the system.
“We dont actually store the fingerprint. We dont want to violate anyones privacy or make anyone uncomfortable,” she said. Instead, the system identifies a set of 40 data points that are matched against the customer the next time. Both Pay By Touch and Discover say the system cannot be reverse-engineered to then create a copy of the customers fingerprint.
If the system fails and improperly rejects a card member, the consumer simply pulls out a credit card and scans it manually.
But in todays extremely competitive credit card business, Discovers goal is to try to leverage its key asset—lower prices to retailers—into a way to get a major chunk of market share from grocery chains and related retail establishments where credit cards are rarely used.
Although credit cards are seen widely in more and more types of retail businesses, a slight majority (59 percent) of the $8.2 trillion worth of American transactions today are made with cash or checks, according to BusinessWeek magazine. Those are a lot of hands up for grabs and Discover wants to scan a finger from each.
The grocery market “doesnt tend to be a credit-dominant place so were going to capture more transaction volume,” Offereins said. “Were taking share from other payment mechanisms. Its all about moving more volume onto our offering, our Discover card.”
Convenience for consumers is key, but making retailers supportive of the lesser-known Discover is even more critical. In the business of dollars and cents, the best argument is one based on dollars and cents. American Express typically charges retailers about 2.6 percent of a customers purchase, while Visa and MasterCard typically charge about 2 percent. Discover typically undercharges Visa and MasterCard by about 15 percent, according to The Nilson Report.
“What is very appealing about Discover is that Discover is as concerned about our [retailers] as we are about our consumers. I wouldnt say the positioning from Visa and MasterCard is the same positioning,” Offereins said, firing a shot at her arch rivals. “We are a very merchant-friendly company. We make it convenient for [retailers] to retrofit their [point-of-sale]” systems.
She specifically cited cost/pricing issues as the key difference: “We price the transactions for the [retailers] so that they get all the benefits of having this authenticated transaction whereas Im not sure Visa and MasterCard would necessarily do that.”
Pay By Touchs agreement with Discover is not exclusive, so the machines that Discover is helping to put in across the nation could just as easily also house MasterCard, Visa and American Express data. Thats why Offereins is pushing their retailer-friendly price position.
Discover is also very aggressive with its cash-back promotions, which can help retailers by encouraging additional sales in specific areas, such as dining out.