Pressure Mounting On Discover’s Pulse

Discover’s success with its flagship Discover It card helped the issuer and card network to drive strong growth in second-quarter card sales. But pressure is mounting on the debit side of the business.

During a July 23 conference call with analysts, Discover Chairman and CEO David Nelms noted the company achieved increased wallet share among existing customers and added loans from new accounts as well.

“The overall value proposition of Discover It continues to resonate with customers as evidenced by another quarter of double-digit new account growth year over year,” Nelms noted in commenting on card-sales growth for the quarter. “Additionally, we added some new designs for the card and we rolled out a new cash-back rewards card primarily to appeal to students.”

The free FICO scores that come with Discover IT have been very well received by consumers and not widely copied by competitors,” Nelms said. “In fact, I think we’re still the only ones who offer it on the statements.

Discover also added some unusual security features to the product, Nelms added. “We’ve put in the ability for a consumer to turn their card on or off with the flick of a button online if, for instance, they misplace their card, which I’m not familiar with other competitors having that,” he said. “We’ve continued to enhance the rewards program as well.

But news was not all good for the company, whose overall payment segment volume growth jumped 3 percent, and two of the newer emerging-payment partners went live with transactions during the period. Discover’s Pulse network is dealing with volume and margin pressures caused by heightened debit card industry competition. As a result, the company expects to lose a large issuer beginning next year that could affect volume significantly, Nelms said.

“While the prospect of losing some business down the road is disappointing, this loss is not material relative to the profitability of the total company,” he told analysts. “With that said, we are very pleased with the branding and superior returns that our network helps drive for our card business. And we do remain focused on improving third-party volume over the long term.”

During the second quarter ended June 30, Discover reported net revenue of $2.17 billion, up 6.4 percent from $2.04 billion during the same period last year. Net income was $644 million, up 7 percent from $602 million, driven primarily by profitable loan growth and share repurchases, Nelms said on the call.

Discover Card sales volume totaled $29.3 billion, up 6.2 percent from $27.6 billion. Total Discover Card volume was $31.7 billion, up 6.7 percent from $29.7 billion.

In terms of network sales volume, Pulse Network volume reached $41.5 billion, up 3.5 percent from $40.1 billion; Diners Club, $6.7 billion, down 1.5 percent from $6.8 billion; network partners, $2.6 billion, up 8.3 percent from $2.4 billion; and Discover Network-Proprietary, $30.3 billion, up 5.9 percent from $28.6 billion.

Network transactions processed by Discover Network totaled 514 million, up 6.4 percent from 483 million, while Pulse volume totaled 1.09 billion, up 1.9 percent from 1.07 billion.

The net principal charge-off rate (based on total receivables) for the quarter was 2.33 percent, down slightly from 2.34 percent a year earlier and down a basis point from the previous quarter.

Average credit card loans were $51.7 billion, up 5.5 percent from $49 billion. The credit card loans delinquency rate over 30 days past due was 1.63 percent, up from 1.58 percent. The credit card loans delinquent over 90 days was 0.8 percent, unchanged from a year earlier.