Discover: No 'Big Volume Benefit' from PayPal Pact This Year

Executives at Discover Financial Services sought to temper investor expectations of quick results from its partnership with PayPal, instead emphasizing the long-term benefits of the alliance, as well as other ongoing initiatives.

Discover's deal with the eBay unit allows Discover merchants to also accept PayPal's digital wallet at the point of sale. These PayPal transactions would be handled on the Discover network. While speaking at the PaymentsSource Card Forum & Expo earlier this month, Don Kingsborough, PayPal's vice president of retail services, said the partnership would go live on April 19.

But during Discover's first-quarter 2013 conference call with investors, Discover chairman and CEO David Nelms emphasized that the rollout will be gradual.

"What we have committed to do is to work as hard as we can to turn on our merchant acquirers and our entire merchant base to PayPal. But that doesn't happen with a flip of a switch," Nelms says.

"I think for us the volume will build gradually and I wouldn't really think about a big volume benefit this year," he adds.

The initiative is one of many that Riverwoods, Ill.-based Discover says added expenses to its payment services division in an attempt to build longer-term sustainability of its card business. In addition to the PayPal partnership, Discover is involved in emerging payments initiatives with Google and Isis and the nationwide rollout of the Discover "it" card, a product that does not charge annual, over-limit or foreign transaction fees.

"This will be an investment year for payments," says CFO R. Mark Graf. "We're working on a number of different opportunities that will depress profits in the second year term which we will believe will position us for volume and revenue growth over the longer term."

Discover has increased its consumer marketing expenses for many of these new products and initiatives, but Nelms noted that PayPal is responsible for marketing the benefits of the Discover partnership to consumers.

Discover reported net income of $673 million for the quarter ending March 31, up 4% from net income of $650 million a year earlier. Revenue (net of interest expense) was $2 billion in 1Q13, up 10% from revenue of $1.8 billion a year earlier.

Discover also initiated a two-year, $2.4 billion stock repurchase program and increased its quarterly stock dividend.

"We're trying to navigate a healthy balance between deploying that capital into the business to drive compounding value and profitable growth over the long haul, as well as make sure we don't just start building some large capital hoard," Graf said.