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Making Money

It Pays to Discover

By Making MoneyFOXBusiness

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.

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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.