Sam's first to Discover: club now accepting card - Wal-Mart Stores Inc. Sam's Wholesale Club, Discover Card Services Inc.'s Discover, credit card

Discount Store News, May 20, 1991 by Arthur Markowitz

BENTONVILLE, Ark. -- Sam's Club has become the first membership warehouse to directly accept a regular credit card, the Discover Card, a move that reflects the financial muscle of its parent Wal-Mart.

Neither Sam's nor Discover Card Services would disclose the fee the credit company, a subsidiary of Sears' Dean Witter group, is charging the club. But it's believed to be under 1%, among the lowest--if not the lowest--charged in the credit industry.

Membership warehouses' knock against accepting plastic has been the minimum 1.5% to 2% fee charged by credit firms, which would cut into the clubs' low 8% to 10% margin.

Some clubs have played with the idea of credit, but none have allowed customers to pay with traditional charge cards. Wholesale Depot has just ended its test acceptance of MasterCard and Visa in one club, while Costco last year dropped its affinity credit card, the only plastic accepted by that club.

Pace Membership Warehouse is currently reviewing the affinity Visa which is sponsored by Price Savers, the club that Pace acquired earlier this year. Price Savers accepts only its own Visa card, even though the charge Visa card, although the charge card can be used for purchases at any Visa member.

Sam's, Pace, Wholesale Depot and BJ's Wholesale Club also provide a fund transfer service in which members can use a credit card to obtain a check that is accepted by the club. Comdata Corp. and National Card, the two firms providing this service, charge a fee based on the amount of the check. Shoppers also have to pay their usual charge for use of their bank card.

A Sam's executive said the club decided to accept the Discover card as doing so would generate more incremental business. Shoppers who didn't have enough cash would be able to make large purchases using the card.

Mervyn D. Weich, Wholesale Depot chairman, said MasterCard and Visa didn't increase sales at the test club. Pace president Charles Steinbrueck said the club was studying the Price Saver program to see if it produced incremental volume.

The fee credit firms charge businesses accepting their card is called a merchants discount rate (MDR). Discover and Sam's, in a joint press release, said the MDR hasn't affected Sam's traditional low wholesale club margins nor caused it to raise prices to cover the charge. Trade sources said Sam's MDR was under 1%, perhaps as low as 0.5%.

This low MDR reflects a number of factors:

* Discover Card is in fierce competition with MasterCard and Visa for market share. Accordingly, Discover pegs its MDR under the other two charge cards to attract merchants.

Kurt Peters, editor of Credit Card News, said that in 1989, (the most recent year for industrywide figures) Visa's volume was $134 billion, MasterCard, $83.4 billion and Discover only $14.5 billion. The Nilson Report, another credit industry publication, noted that nearly 3 million business--retailers, restaurants, etc.--accept MasterCard and Visa, while only 1.24 million accept the Discover Card.

* Discover Card expects a high volume of charges from the card's usage by shoppers at both Sam's and Wal-Mart, which began accepting the credit card in August 1990, two months prior to Sam's.

Wal-Mart has accepted MasterCard and Visa for a number of years, with the two cards accounting for about $10 billion in sales, one trade source estimated. Discover Card is shooting for some of that volume, along with sales from Sam's, where it will be the only charge card accepted. The fierce fight for market share has also resulted in high volume retailers being in a strong position to negotiate the lowest MDRs.

Wal-Mart's sales muscle means it gets the lowest MDR from all credit companies.

The two bank cards lowest MDR rate is about 1.25% to 1.85% of the sale, depending on such ancillary factors as whether the charge is processed electronically or manually. Discover's MDR usually ranges between 1% and 1.2%.

When Wal-Mart first accepted the Discover Card, Dean Witter heralded the move with a full-page ad in the Wall Street Journal and by announcing the relationship in monthly bills sent to Discover's 36 million cardholders.

Sam's is promoting the card with in-store banners.

Sam's members will be able to use the Discover Card to renew their membership.

Al Johnson, Wal-Mart vice chairman and ceo of Sam's, said in the joint announcement that "based on our volume and improved technology, we are now able to offer this additional benefit to our members, without, of course, raising prices."

The technology refers to Wal-Mart's satellite system, which also covers Sam's. This technology, used to instantly transmit charge sales to the credit provider for approval, has sharply reduced expenses for the credit companies.

Pace, which is part of the Kmart retailing conglomerate, is the only other wholesale club that could mirror Sam's move by tying into the volume of its parent.

Steinbrueck said the club was looking at the possibility of accepting the Discover Card and other charge cards. One of the key considerations, he said, was whether the cards would generate incremental business to justify their acceptance or whether the club would be trading cash and check sales for credit volume.