Discover Financial Services may be having more success than its peers in getting consumers to revolve balances from month to month — which is where more profits lie.
But the Riverwoods, Ill.-based credit card issuer is not going after subprime borrowers, David Nelms, Discover's CEO, told analysts June 19 when discussing the company's second-quarter earnings.
Instead, it is "fine-tuning" its underwriting standards and approving new credit lines for people with less-than-stellar credit scores who otherwise appear to be good risks, Nelms said.
There is "a small subset of people who have less than (prime credit scores), but have other characteristics that we think can be attractive from a credit performance" perspective, he said.
Discover evaluates borrowers based partly on FICO scores, which range between 300, for the riskiest borrowers, to 850. Discover is approving certain borrowers with FICO scores below 660 if they meet other criteria to indicate they are a low risk, Nelms said.
The boundaries in credit-card lending may be somewhat hazy when it comes to defining exactly what a subprime borrower is.
TransUnion LLC says its data show a growing number of credit-card issuers are approving borrowers with poor credit scores (
By dangling cash rewards and other promotional offers and carefully evaluating customers, Discover is attracting more-profitable "revolvers," or people who maintain a balance from month to month, Nelms told analysts.
Total credit card loans Discover held at the end of its second fiscal quarter, which ended May 31, rose 3.6%, to $46.6 billion from $45 billion. Revolving credit as a whole continues to decline, according to Federal Reserve data (
"We continue to achieve strong receivables growth, while the overall card industry remains relatively flat," he said.
Discover recently launched its first cobranded affinity card, with the nonprofit organization Ducks Unlimited Inc., Nelms said. But despite Nelms' past as an executive at erstwhile credit card affinity giant MBNA Corp., Discover has no plans to move aggressively into the affinity card segment, he said.
Affinity cards are "a natural extension" of existing products, he said, adding "there is no target to sign a whole bunch of new affinity groups over the next quarter or anything like that."
While Discover saw strong transaction volume growth during the quarter from its Pulse PIN-debit network, Nelms signaled his concerns about competitors' responses to new debit network-routing rules.
Visa on April 1 announced a so-called fixed acquirer network fee, which riled merchants by requiring them to pay in advance to accept Visa cards (
The Department of Justice in March launched an investigation into Visa's new policies, the network disclosed in May (
Visa claims the vast amount of debit card market share. Nelms suggested Visa's new policies could put Pulse's recent growth surge at risk.
"When a 70% market share competitor makes moves tying products together and launching fixed/variable pricing designed to take advantage of that 70% market share, we become -- we and many others in the industry become concerned about having a level playing field," Nelms said.
Discover's net income for the quarter declined 10.5%, to $537 million from $600 million, during the same period a year earlier. Revenue net of interest expense rose 6.3%, to $1.85 billion from $1.74 billion.
The firm's Direct Banking unit, which includes credit card lending, generated income of $820 million, down 7.2% from $883 million.
Credit-card sales volume for the second quarter rose 5.2%, to $26.1 billion from $24.8 billion.
The charge-off rate on credit-card loans declined 222 basis points, to 2.79% from 5.01% a year earlier.
Discover's Payment Services unit, which includes its Pulse PIN-debit card brand, drove income of $47 billion, up 9.3% from $43 billion a year earlier.
Transaction volume processed through the Pulse network rose 14.4%, to $42 billion from $36.7 billion a year earlier. Card volume from third-party issuers rose 22.2%, to $2.2 billion from $1.8 billion. Network volume processed through Discover's Diners Club International brand declined 2.7%, to $7.2 billion from $7.4 billion.
