Discover Credit Cards Will Be Accepted Overseas

Discover Financial Services is buying 58-year-old Diners Club International from Citigroup Inc. for $165 billion. It means that in a couple of years Discover cardholders will be able to use their plastics abroad: pay for a hotel in Monaco or for dinner in Paris. The deal is expected to increase transaction volume and global acceptance of Discover cards. That will significantly improve the company's competitive position on the credit card market.

Discover will acquire the Diners Club International network, brand, trademarks, employees, and about 40 license agreements with Diners Club cards issuers. It will allow Discover to broaden its network to 8 million merchants in 185 countries.

Discover plans to complete the deal with Citigroup within three months, and the total integration with Diners Club can take up to three years. Obviously, it is not something that can be done for a short period of time.

Under the terms of the transaction, Discover is not going to issue credit cards on the international markets. It means that Discover is not adding credit risk. The lending will be done by the existing Diners Club credit card issuers, for example Citigroup.

Financial experts regard the acquisition as an excellent strategic move for Discover. The deal gives the company a much-needed international presence. American cardholders will be able to use their Discover credit cards at worldwide outlets that accept Diners Club plastics. It shifts the company from a regional network to a global network and enables them to compete on a global stage.

Then, the deal will allow Discover to benefit from increased transaction volume, both from Discover cardholders using the overseas Diners Club network, and foreign Diners Club cardholders making purchases in the U.S. on the Discover card network. Nowadays commercial and business clients spend more than $30 billion each year with Diners Club credit cards outside the U.S.

The move was also beneficial for Citi. The company was trying to get rid of unnecessary businesses after it lost $9.83 billion in the fourth quarter last year. The loss of income was a result of U.S. subprime mortgage crises. The transaction will allow Citigroup to streamline operations and focus on stronger businesses.

The acquisition shows that Discover is not only interested in increasing their presence in the financial services industry, but also in diversifying the types of merchants within their network. They hope to pursue American Express because Diners Club has historically been focused on the high-end, corporate travel and entertainment merchant sector, which is American Express's sweet spot.

Let's see whether Discover's expanded presence will pose a threat to major American credit card brands. It will soon be clear whether the strategy and investments can attract new clients from Visa, MasterCard and AmEx.