Discover Financial Services has benefited from making fewer bad loans, but much of its growth actually may come from products other than credit, according to executives at the company.
“Moving to the front of consumers’ wallets, that has always been a challenge” for Discover, says Michael P. Taiano, a credit card industry analyst at Sandler O’Neill & Partners. ”And I think it will continue to be a challenge, although they have made some progress.”
Discover’s core customers are not the same “big spenders” that American Express Co. has, Taiano says. “But I think they are defining themselves as a broader consumer lender and expanding into some other types of loan products.”
David Nelms, Discover chief executive and chairman, contends his company’s direct-banking strategy could be a boon for potential future business. “The way we look at it is credit cards are part of direct banking,” he said in an interview. “We think that the combination of technology and consumer demand–those two things coming together–can cause a lot more growth across lots of banking products, including student loans.”
In January, Discover bought Student Loan Corp. from Citigroup Inc. for $600 million.
Nelms expects to add other direct-banking products to Discover’s roster, such as mortgages and direct checking accounts, over the next few years. “Branches are very expensive,” Nelms said. “If you are a company like us, we can offer a better deal for the consumer.”
The Riverwoods, Ill.-based company says it beat Wall Street’s expectations with fiscal first-quarter growth driven by improvements in credit performance and an increase in card sales. Discover reported $465 million in profit for the quarter, which compares with a net loss of $104 million a year earlier. Net revenue increased 3.4%, to $1.73 billion from $1.79 billion.
Discover’s U.S. card sales volume totaled $24 billion, up 7.1% from $22.4 billion. Credit card loan receivables fell 3.3%, to $44.3 billion from $45.8 billion, while total loan receivables increased 3.2%, to $51.7 billion from $50.1 billion. (
“If you look at the sequential improvement” in credit performance, “it doesn’t show any sense of slowing down yet. But clearly it will start slowing,” Nelms told analysts during a March 22 conference call to discuss earnings. “I would expect that over the coming quarters it will start to moderate and will start to approach whatever the trough is.”
Discover earned 84 cents per diluted share in the quarter ended Feb. 28, up from a net loss of 22 cents per diluted share a year earlier. Analysts’ predictions averaged 51 cents a share.
Nelms said he expects upcoming network-routing rule changes caused by the Durbin amendment to the Dodd-Frank Act to potentially benefit Discover. He said he has had discussions with retail-bank executives that have said, regardless of the outcome of the legislation, that they plan to put more than signature-debit networks on the cards they issue.
“They are going to have someone like Pulse to provide competition,” Nelms said in the interview, referring to Discover’s electronic funds transfer network. “A lot of the banks that we talk to may want to split their volume, just to show how competitive the industry is.”
Discover also is working on mobile payments as a part of the Isis system with mobile carriers AT&T Inc., Verizon Wireless and T-Mobile USA. But at Discover’s annual Investor Day Wednesday, executives had few new details to provide on this venture.
“All they are saying now is there is a potential growth opportunity,” says Taiano. “It’s something they are planning on investing in. They haven’t made it out to be this great earnings driver for the company in the next couple of years.”
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