Discover Financial Services
reported an impressive third quarter, highlighted by a widespread
improvement in credit quality. Charles Davis looks at the ways in
which the US company is pushing for greater customer retention that
includes diversification beyond card products.


With its financial scenario
steadily improving, Discover Financial Services has turned its
attention to increasing merchant acceptance and expanding the reach
of its Pulse PIN debit network as part of a renewed push for
greater customer retention.

Discover’s September charge-off
rate was 7.15%, down 83 basic points from 7.98% in August. The
issuer’s third-quarter sales volume was $24bn, up 5.3% from $22.8bn
a year earlier – the fourth consecutive quarter of growth.

In a conference call with analysts
and reporters, Discover chairman and CEO David Nelms said that the
issuer’s growth was driven by increasing average spend from loyal
customers and the systemic effort to increase Discover acceptance
among merchants.

“I was pleased with the 5% growth
in Discover card-sales volume and the stabilisation in our credit
card loans this quarter, which were essentially flat in the second
quarter of 2010,” Nelms said.

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Pull quote from articleNelms said Discover had signed all 100 of the top retailers
in the US and added the goal of the merchant acceptance efforts is
to close the gap with Visa and MasterCard.

On the debit side, Nelms said that
teaming with Pulse has given its network much needed volume and has
made Discover an increasingly viable competitor in the debit

Sales volume for Pulse during the
third quarter and rose 8.9% to $30.6bn, from 28.1bn a year earlier.
Total transactions processed on the Pulse network rose 17.1% to
$882m, from $753m.


More than a credit card

Discover has ramped up its consumer
marketing back to historical levels, another sign that the issuer
has entered a post-recessionary scenario. It launched several
television and online advertising spots to tout the company’s
customer service and its cash-back rebates, and it also announced
it will be a title sponsor for college football’s Orange Bowl.

Discover has also made moves this
year to strengthen other parts of its business. It teamed with the
processor Heartland Payments Systems to create a campus card system
that linked students’ financial aid disbursements to a
Discover-branded debit card, and branched into decoupled debit
through Tempo Payments

In a huge strategic departure for
what has been a card-centric company, Discover plans to further
diversify beyond the card business with its planned $600m student
loan acquisition.

From a newly acquired student loan
portfolio to direct mortgage and checking accounts, Discover is
much more than a credit card company these days. Its Discover Bank
subsidiary, which issues cards, also sells online savings, money
market, certificate of deposit and IRA CD accounts. Discover
recently announced it had agreed to buy Student Loan Corp for $600m
from Citigroup.

Nelms said he anticipates demand
for student loans outstripping credit cards over the next five
years as the cost of education continues to rise and
government-backed loans become harder to obtain.

“It does afford us the opportunity
to cross-sell to them over the life cycle,” he said. “At some point
they are going to want different products. They are going to want a
credit card.”

Discover started student lending in
2007, but its plan to buy Student Loan Corp would dramatically grow
the portfolio.

As of 31 May, Discover had a
student loan portfolio of $1.64bn – $819.9m in private student
loans and $822.3m in federal loans. The Student Loan Corp deal will
give Discover some $4.2bn worth of newly acquired private

Discover, like all US card issuers,
is facing revenue losses from the limits on the fees and interest
rates lenders can charge because of the Credit Card Accountability,
Responsibility and Disclosure Act. Student loans can make up some
of that lost income while also introducing a new generation of
college students to its credit products.


Bonus rewards

Discover’s recently launched Motiva
card would seem an ideal candidate for those newer cardholders.
Motiva is a credit card product that offers special rewards to
customers who make consistent on-time payments.

Cardholders who pay at least the
minimum amount on their Discover Motiva bill by the due date for
six straight months receive a bonus equal to the amount of the
following month’s interest. Motiva cardholders are also permitted
to make same-day payments via telephone, including on the due date,
without any fees.

Motiva also comes with supersized
cash-back bonuses – 5% to 20% for patronising selected online
retailers through Discover’s own exclusive online shopping

Discover has dramatically enhanced
its rewards redemption experience as well, offering a redesigned
redemption site giving cardholders access to hundreds of additional
brand-name retailers and more options for redeeming cashback bonus

Bonus redemption options still
start as low as $20 and there are now more ways for cardmembers to
redeem, including:

  • Partner and Discover gift
  • Merchandise;
  • Charity
  • Direct deposit;
  • Statement

Cardmembers can also choose a
split-pay option on select merchandise, allowing them to pay for a
portion of the price with their cashback bonus and put the
remaining balance on their Discover card.

It’s a multi-faceted expansion, one befitting an issuer emerging
from the doldrums, and positions Discover nicely for a run at the
broad middle market in not only cards but lending and consumer
banking as well.