As Discover Found Out, Some Cash Rewards Will Bite Harder Than Others

Merchants and card issuers long ago discovered the value of cash in driving transaction volume, but on Thursday Discover Financial Services demonstrated how expensive some rewards categories can be. Discover reported $677 million in discount and interchange revenue for the first quarter, up 5% from the same quarter last year. But offset against that number was $446 million in rewards cost, up $54 million, or fully 14%. That was enough to chop net discount and interchange revenue down to $231 million, a 9% drop.

Discover’s top executives blamed a 5% rewards program that in the first quarter focused on groceries, an expensive category. By contrast, Discover featured gasoline in the first quarter of 2018. “The grocery category is the most lucrative [for consumers],” said R. Mark Graf, Discover’s chief financial officer, according to a transcript of Discover’s first-quarter earnings call Thursday. “It’s really easy for people to engage and max out the benefits. If you think about it, to spend $1,500 in groceries in the quarter, you only need to spend something less than $125 a week. So not a lot of people spend that on gas, but a lot of people spend that on groceries.”

But if rewards costs bit hard in the quarter, Discover’s network services posted strong results. Volume on its Pulse debit network totaled $47.1 billion, up 9%. “Certainly, Pulse represents a significant portion of our profitability,” said Discover chief executive Roger Hochschild, according to the transcript. “They continue to execute well as you can see from the growth there, and we see room for continued growth.”

Traffic for network partners came to $5.66 billion, up 24%. Diners Club International fell a tick to $8.28 billion down from $8.39 billion. A chief client of the network partners program is SAP’s AribaPay business-to-business payments service, which combines payments with remittance data.

Transactions on Pulse totaled 1.13 billion, up 14%, while transactions on the Discover Network grew 10% to 605 million transactions.

Overall, Discover reported $726 million in net income on $2.76 billion in revenue net of interest expense, increases of 9% and 7%, respectively.