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Discover Gets ‘Historic Opportunity’ With Mobile Deal

Discover Financial Services, the payments processor whose stock has outgained three bigger rivals, may get another boost after the largest U.S. mobile carriers chose its network for a new venture, analysts said.

“This is a solid move for Discover in the U.S. mobile-payments space and this is value-enhancing to its network and possibly the company’s shares over the intermediate to longer-term,” wrote Sanjay Sakhrani, an analyst with KBW Inc., in a research note today.

AT&T Inc. and Verizon Wireless are leading a venture to create Isis, a mobile-commerce network that would let people make purchases by waving smartphones near “contactless” readers in stores. That could threaten Visa Inc., MasterCard Inc. and American Express Co., whose fees and merchant contracts have faced increasing scrutiny from regulators and lawmakers, which Riverwoods, Illinois-based Discover has largely avoided.

Mobile payments in the U.S. may climb to $214 billion in 2015 from $16 billion this year, said Gwenn Bezard, an analyst with Boston-based consulting firm Aite Group LLC, in a report today.

“Discover has a historic opportunity to become the network of choice for a host of firms in need of a reliable pipe connecting to merchants’ point of sale,” Bezard said. Discover’s “underdog position,” its roots as an offshoot of Sears Roebuck and Co. “and good relationships with the merchant community could be serious assets as mobile commerce gains momentum,” he wrote.

Discover gained 25 cents, or 1.4 percent, to $18.35 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have climbed 25 percent this year, compared with a 13 percent drop for San Francisco-based Visa and MasterCard’s 8 percent decline. New York-based AmEx advanced 2.2 percent on the year.

Smartphone at Checkout

Isis, named for the Egyptian goddess of simplicity, would allow a consumer to pay for purchases by holding a smartphone with an embedded radio microchip near a reader at checkout. The near-field communication technology, or NFC, may supplant plastic credit and debit cards and let retailers send customers electronic receipts and rewards immediately.

While investors may deem Discover’s deal with the wireless carriers a victory at the expense of larger rivals, it’s still too soon to declare a winner, according to Sakhrani. Visa and Purchase, New York-based MasterCard already are working with card-issuing banks to test mobile payment technologies worldwide. Isis may not be available commercially in the U.S. for 18 months, the mobile carriers said yesterday.

Other Networks

“There are no details around the terms of the arrangement and whether or not other networks could potentially be allowed to participate,” Sakhrani said in the note. “The success of the joint venture will hinge largely on other issuers signing up with Isis to increase the visibility among consumers.”

Sakhari rates Discover “outperform” and has a $20 price target.

The carriers’ decision to use NFC, a technology available in less than 2 percent of U.S. point-of-sale terminals, “limits the near-term impact on the industry,” said Adam Frisch, an analyst with New York-based Morgan Stanley, in a note to clients yesterday.

T-Mobile USA, a unit of Deutsche Telekom AG, is a partner in the Isis venture. Verizon Wireless is co-owned by Verizon Communications Inc. and Vodafone Group Plc.


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