It Pays to Discover

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 transactions.

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, so now consumers find themselves using their cards and getting a smile and a thank you 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 spent $8,326, from $7,781, in 2010. Monthly purchases are also climbing.

The idea is to promote and push small purchases:

• Average ticket transaction $38 • Median ticket transaction $19 • 30% transactions less than $10

All of these trends bode well for Discover Financial (NYSE:DFS), which has enjoyed a strong rally from its 52-week high. The company known for pioneering several things in the consumer card industry also provides other services, including:

Home loans Private student loans Personal loans Online savings account and banking

Despite the big move in the stock company shares are still changing hands at low valuations:

 Price/Earnings 9  PE/Growth 0.82  Price/Book 2 times

This morning the stock is up on news of more innovation. PayPal 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, Discover 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.

Charles Payne, a FOX Business contributor, is president of Wall Street Strategies. At the time this article was published he, his firm and/or his family did not own securities in Discover Financial.