Discover CEO Nelms Calm to Rewards Rush from Rivals

Discover's not worried about the increase of alternative payment companies offering hefty rewards in an attempt to cut into interchange revenue, Chairman and CEO David Nelms told investors on April 22.

"We've seen over many years where players will come in with high rewards programs and then pare them back," Nelms said during Discover's first quarter earnings conference call.

Nelms did not mention specific companies. But a number of startups are trying different pricing models, marketing and rewards programs to lure merchants by lowering or offsetting merchant fees.

Discover offers its own rewards programs, though Nelms says the company's focus is more on long-term relationships rather than luring a quick, but short-term boost in customer activity. Discover reported $265 million in rewards costs in the first quarter, up 16% from $229 million in the first quarter of 2013, with new interchange revenue of $254 million, down from $263 million in the first quarter of 2013.

"There are some people who are being more aggressive with rewards. I don't think the current period is any different. You'll see players come in and rotate out," Nelms said. "We are focused on growing total profitability and not just short-term rewards."

During the first quarter, Discover reported net income of $631 million, or $1.31 per diluted share for the first quarter of 2014, down 6% from $673 million, or $1.33 per diluted share, for the first quarter of 2013. The company attributed the decline to higher provisions for loan losses, which offset growth. The performance still beat the average estimate of $1.25 per share, based on a survey of 25 analysts by Bloomberg.

Discover will also benefit from its partnerships and new deals, Nelms said. Discover's recent deals include Square's decision to accept Discover and Diners Club credit card payments in Canada, joining American Express, Visa, MasterCard and JCB credit cards. Discover also partnered with youth payments company Oink to add scale to Oink's efforts to adapt its online payment system for in-store use. TSYS also recently agreed to process PayPal payments made through the eBay subsidiary's partnership with Discover.

Discover is also patient while its efforts to enable PayPal in stores gain traction, Nelms said.

"We value PayPal as a partner and are very optimistic in the long term," he said. "I would say that they are going to test and learn and develop as time goes on. Where we start and where we end will change, and that is what's going on with other players in the [e-commerce] space."