In Depth

Nelms: ‘It’ Card And Free FICO Scores Fuel Discover’s Q1 Receivables Growth

During the first three months of the year, Discover Financial Services’ card receivables grew by nearly 5 percent, at the upper end of the company’s targeted range. Much of the gain was through existing customers and the continued success of the Discover It card, which drove double-digit growth in new accounts, David Nelms, chairman and CEO, told analysts during an April 22 earnings call.

“We’re now on the one year anniversary of really launching Discover It broadly, so when we talk about double-digit (growth), that’s lapping the increases that we had in the initial launch of Discover It,” Nelms said in response to an analyst’s question.

Discover also has added innovative features, including free FICO scores on card member statements, and it continues to enhance its online application to drive new accounts, Nelms added.

Card sales volumes growth in the quarter was 3 percent, and Nelms stressed that much of industry’s card-sales growth is coming from high-spend transactors, while industry profitability primarily is still driven by receivables, not sales.

“Our card business is focused on prime revolver sales, and we’ve been taking share in this segment,” he said. “Furthermore, we are not sacrificing quality to achieve growth as credit in our card business continues to remain exceptionally strong.”

Discover also is continuing to leverage its brand, customer base and risk-management skills to grow profitably and expand its newer direct banking products, Nelms said.

“In payments, we continue to increase global acceptance, enhance security and look for ways to partner to increase volume while navigating through some clear challenges in the segment,” he said.

In terms of new customers, many are younger, perhaps attracted to a digital kind of focus while many also may find the free FICO scores appealing because they may still be building their credit scores, Nelms added.

Discover continues to try to be efficient with its marketing. At the same time, Nelms said, the company is getting better at Internet direct digital marketing.

Asked whether PayPal’s slow growth in point-of-sale activity across Discover’s rails is a sign that it has yet to show any understanding of what a value proposition would need to be at a physical point of sale, Nelms suggested the analyst ask PayPal that question.

“We value PayPal as a partner,” Nelms said. “We still are very optimistic in the long-term, but what I would say is that they are going to continue to test and learn and develop… . And you are seeing that with all the other players in the space as well, whether it’s Amazon or Google or Apple; they’re all changing as time goes past.”

During the first quarter ended March 31, Discover reported net revenue of $2.08 billion, up 4.5 percent from $1.99 billion during the same period last year. Net income was $631 million, down 6.2 percent from $673 million.

Discover Card sales volume totaled $25.7 billion, up 3.4 percent from $24.86 billion.

In terms of network sales volume, Pulse Network volume reached $41.9 billion, up 5 percent from $39.9 billion; Diners Club, $6.5 billion, down 1.5 percent from $6.6 billion; network partners, $2.4 billion, up 9.1 percent from $2.2 billion; and Discover Network-Proprietary, $26.5 billion, up 3.1 percent from $25.7 billion.

Network transactions processed by Discover Network totaled $461 million, up 4.3 percent from $442 million, while Pulse volume totaled $1.04 billion, up 2 percent from $1.02 billion.

The net principal charge-off rate (based on total receivables) for the quarter was 2.32 percent, down from 2.36 percent a year earlier but up 23 basis points from the previous quarter.

Average credit card loans were $51.3 billion, up 4.1 percent from $49.3 billion. The credit card loans delinquency rate over 30 days past due was 1.72 percent, down from 1.77 percent. The credit card loans delinquent over 90 days was 0.87 percent, down from 0.91 percent.

 

 

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