FEBRUARY 2005

Wal-Mart and Discover Partner to Issue Card

Discover Financial Services announced in late January that it will partner with GE Consumer Finance and Wal-Mart to issue a co-branded, no fee Wal-Mart Discover card. The card will offer cardholders 1% cash back rebates on purchases. Wal-Mart has had a private-label credit card program run by GE Consumer Finance for years, which attracted about 8 million cardholders. Under the new partnership, Discover will process only the transactions on the new co-branded card that occur outside Wal-Mart stores. GE Consumer Finance will continue to handle in-store transactions in order to hold down Wal-Mart's interchange payments.

David W. Nelms, CEO of Discover Financial Sevices, told the American Banker that the deal will give Discover a substantial boost in transaction volume, and open up a host of co-branding opportunities with other retail partners that have private-label programs being serviced by GE Consumer Finance. Nelms said "I view this as an investment year. We are going to, in the long run, have a good payback. I think just as important will be second-order effects to acceptance."

The Wal-Mart Discover card, with GE Consumer Finance as an intermediary, would not have been possible without the landmark Supreme Court ruling that forbid Visa and MasterCard from prohibiting their card-issuing members (including GE Consumer Finance) from also issuing cards with the Discover and American Express brands.

Wal-Mart has been quietly expanding its financial services offerings, to the point that it is beginning to cause alarm among providers of check cashing and money transfer services, as well as community bankers. Since 1992 the company has built partnerships with other financial service providers such as MoneyGram International and SunTrust Banks, to bring financial services into 3,100 Wal-Mart stores. Nearly 1,000 of its supercenters have in-house bank branches. SunTrust is piloting 45 in-store branches that are co-branded as "Wal-Mart Money Center by SunTrust." According to a recent feature story in Business Week, Wal-Mart customers "can cash payroll checks for just $3, transfer money to Mexico for $9.46, and buy a money order for 46 cents." These prices are substantially lower than those of many competitors.

As the largest retailer in the world, Wal-Mart has unparalleled access to customers, with over 100 million customer visits per week. Jane Thompson, President of Wal-Mart Financial Services, told Business Week that "my whole thing is about starting with the customer." Thompson joined Wal-Mart in 2002, and was formerly president of Sears Credit during the 1990s. While Wal-Mart does not yet have full banking powers to offer deposit accounts, mortgages or car loans, many observers see telltale signs that the company is headed that direction. Thompson said "Helping the underserved customer gets right at what we like to be known for." The idea is to establish a link in the customer's mind between Wal-Mart and going to the bank, inevitably bringing more customers into stores. Ronald Ence, vice president of Independent Community Bankers of America, told Business Week, "there's no question, they want to have a nationwide financial-services network. If they do, there's no doubt in my mind they'll be able to do to community banks the same thing they've done to the local grocery store and the local hardware store and the local clothing store."