Discover Financial Services’s lending operations dwarf its payments business, but payments nonetheless are an important component of the company’s growth strategy, new chief executive Roger C. Hochschild said Thursday.
Hochschild, who joined Discover in 1998 and served as its president and chief operating officer for 14 years, this month succeeded longtime CEO David Nelms, who remains as Discover’s executive chairman until early next year. Hochschild held his first conference call as CEO Thursday afternoon to review Discover’s third-quarter results with analysts.
“Growing that business is a big part of our strategy, we have a unique set of assets,” Hochschild said when asked about his plans for the payments business. “We’re really excited about some of the partnerships we have, whether its working with PayPal, or with Apple, or with networks all around the world, so it is a key focus of ours.”
Hochschild, who continues to hold the title of president at Riverwoods, Ill.-based Discover, didn’t disclose any specific initiatives, but indicated he is not planning to diverge anytime soon from the path he and Nelms forged for more than a decade as the company’s top two executives. In that time, the company diversified beyond the Discover credit card to become a major student lender and personal-loan provider. In payments, Discover diversified through its acquisitions of the Pulse debit network and the Diners Club International business, which gave it an international reach through a set a franchises.
“Even with the change at the top, our priorities remain the same,” Hochschild said in his opening remarks. “First, the Discover lend-centric business model, integrated with the benefits of our proprietary network, remains at the core.”
Pulse, Diners Club, and the Network Partners operation comprise Discover’s Payment Services segment, and its business generally was strong in the third quarter. Pulse continued on its recent growth streak, posting volume of $45.2 billion, up 14% year-over-year thanks to new issuers and more volume from existing issuers. Diners Club’s volume rose 5% to $8.4 billion. Network Partners, the smallest part of the unit, had the biggest growth, up 34% to $5.1 billion thanks mainly to more volume in its AribaPay business-to-business network.
Discover, the smallest of the four U.S.-based credit card networks, reported proprietary volume of $36.6 billion, up 9%. Combined, Discover and the Payment Services entities generated $95.4 billion in volume, up 12% from $85.2 billion in 2017’s third quarter.
Higher sales volume produced a 9% increase in net discount and interchange revenue, to $280 million. That figure derives from gross discount and interchange revenue of $753 million, up 12%, less $473 million in rewards costs, which rose 13%.
Payment Services generated $44 million in pre-tax income in the third quarter while the lending operations, called Direct Banking, posted $923 million. But Payments Services’ pre-tax income grew 22% year-over-year compared with 6% for Direct Banking.