IMGCAP(1)]
This story appears in the May 2009 issue of Cards&Payments.
In early December, David Nelms exhorted business, media and government leaders to be more positive as the world worked its way out of a credit crunch and a newly acknowledged recession. "It seems to me that people are almost falling over themselves to say how bad things are and how bad they're going to get," the CEO of Discover Financial Services said during a speech at the Executives Club of Chicago. "The danger with all the negative talk is that it sometimes becomes a self-fulfilling prophecy."
Despite what the negativity may have contributed to the economic downturn, Discover reported net income of $927.8 million in 2008, up 57.6% from $588.6 million the previous year.
A big chunk of Discover's income last year came from an $862.5 million payment from MasterCard Inc. for its portion of an antitrust settlement with MasterCard and Visa Inc. (Visa will pay Discover $1.89 billion over four quarters in 2009.) And Discover's 2007 net income was dinged by a $391 million pretax impairment charge related to Goldfish, its underperforming former United Kingdom card-issuing business. But the settlement windfall helped buffer Discover from a rocky economy.
Sales volume on Discover cards totaled $102.1 billion in 2008, up 2.8% from $99.3 billion the previous year. U.S. managed receivables on Discover cards totaled $51.1 billion in fiscal 2008, up 6% from $48.2 billion the previous year (
As an issuer, Discover's net principal charge-off rate on a managed basis was 5.01% during 2008, up 118 basis points from 3.83% the previous year. Discover increased its provision for managed-loan losses to $3.1 billion last year, up 63.2% from $1.9 billion in 2007.
Discover sold its UK Goldfish card operations to Barclays Bank PLC for $68 million in March 2008. Discover had purchased Goldfish from Lloyds TSB Group PLC in 2006 for $1.68 billion. The sale jettisoned a poorly performing portfolio at a time when "the funding and operating environment for the UK credit card business had become increasingly challenging," Nelms explained in Discover's 2008 annual report to investors.
With cash and capital freed up for other ventures, Discover bought Diners Club International from Citigroup Inc. for $168 million in June. According to the agreement, Discover would continue to honor contracts with some 49 licensees, including Citi, that issue an estimated 6 million Diners Club cards worldwide. As a network, Discover boosted its global acceptance with the purchase by gaining Diners Club's 8 million acceptance points in 186 countries. Discover cardholders now can pay wherever Diners Club cards are accepted, and vice versa.
Diners Club cards contributed some $12.7 billion in payment volume from the time of the brand's acquisition through the end of the fiscal year, Discover says. Volume on Discover's Pulse PIN-debit network rose 23% last year, to $106 billion from $86.2 billion in 2007. Network volume for all third-party payments was $125.1 billion, up 36.4% from $91.7 billion.
The Discover Network processed 1.52 billion transactions in 2008, up 2% from 1.49 billion the previous year. The Pulse network processed 2.7 billion transactions last year, up 17.4% from 2.3 billion the previous year.
By March 2009, Discover's charge-off rate had increased to 7.15% of receivables. But with Goldfish now someone else's problem and the Diners acquisition increasing acceptance, perhaps Discover is positioned for growth–or at least maintenance–in 2009. CP
