Fresh from its spin-off from Morgan
Stanley, Discover Financial Services, the fourth-largest of the US
card networks, has begun trading publicly on the New York Stock
Exchange. Its shares rose modestly during early trading on 2 July
before tailing off, but analysts are optimistic that shares will
rise in the long term, and that the network will gradually increase
its market share against its larger competitors Visa, MasterCard
and American Express.

In particular, Discover is expected to gain a larger slice of
the growing US debit market. The network recently launched a range
of debit-orientated offerings.

Morgan Stanley announced in December 2006 that it would spin off
Discover to allow the investment bank to focus on its investment
banking business. Industry analysts are confident that Discover
will perform well as a stand-alone business.

Discover’s key advantages

In 2006, Discover recorded $4.3 billion in revenue, its highest
revenue figure to date. The Discover spin-off follows MasterCard’s
initial public offering (IPO) in May 2006 and comes ahead of Visa’s
forthcoming transition to a publicly traded company. Since
MasterCard’s $2.39 billion IPO, its share price has risen from $39
to about $165. Most analysts are pricing Discover’s shares around
the $29 to $31 range.

Moshe Orenbuch, an analyst at investment bank Credit Suisse
First Boston, believes that Discover has some key advantages that
will allow it to make headway.

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“As a network, Discover is the lowest-cost network for merchants
and is working to expand coverage of small- and mid-sized merchants
domestically, and signing partnership agreements to extend its
coverage internationally. Its acquisition of the Pulse network in
2005 gave the company access to the fast-growing debit market,” he

“[Discover’s] management is focused on increasing its share of
wallet in its US card business, as the company has an enviable base
of 45 million accounts.

“About 10 percent of managed receivables are in the UK, and the
focus is to reduce the losses and return the UK business to
profitability during 2008.”