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Newspapers, television, and the Web are full of bleak assessments about the U.S. economy, but you wouldn’t know that from the latest financial and operating results reported by Discover Financial Services, the credit card issuer and student-loan provider that’s also the fourth-largest general-purpose credit card network. Discover card sales volume jumped 9% from a year earlier to a record $26.3 billion for the company’s third fiscal 2011 quarter ended Aug. 31.
Riverwoods, Ill.-based Discover’s other payment units also posted strong dollar volume. The Pulse electronic funds transfer network came in with $35.1 billion, up 15% from $30.6 billion in fiscal 2010’s third quarter. Diners Club International’s volume jumped 17% to $7.66 billion, and volume from Discover’s third-party card issuers grew 11% to $1.98 billion. Combined, the Pulse, third-party and Diners Club volume grew 15% to $44.8 billion. The grand total of Discover proprietary, Diners Club, debit and third-party volume came to $71.9 billion, up 13% from $63.8 billion a year earlier.
In transactions, Pulse grew 8% year-over-year to 950 million for the quarter. Discover Network volume also grew 8% to 451 million, bringing the total to 1.4 billion versus 1.3 billion in 2010’s third quarter. Gross discount and interchange revenues increased 10.5% to $517 million. Partially offsetting that were rewards expenses of $234 million, up 20.6%.
Chairman and chief executive David W. Nelms said Discover’s net number of active merchants increased 7% in the quarter, though he would not reveal the exact number. Merchant-acquiring industry observers, however, believe Discover’s U.S. merchant base is now at or near parity with the Visa/MasterCard merchant base of about 8 million. Riverwoods, Ill.-based Discover about five years ago began enlisting bank card acquirers to offer Discover acceptance to small and mid-sized merchants. “We know it’s having a positive impact,” Nelms said during a conference call with analysts Thursday morning.
Nelms also said Pulse, which has 4,500 debit card issuers, is poised to pick up new business as a result of new Federal Reserve Board regulations implementing the Durbin Amendment in the 2010 Dodd-Frank Act. The amendment bans exclusive network affiliations in which debit cards connect to networks under common ownership. That provision is seen as hurting Visa Inc., which owns the big Interlink PIN-debit network, and benefiting rivals such as Pulse. Nelms wouldn’t give numbers, but said Pulse has been “responding to a substantial number of RFPs (requests for proposals) for new business. We are in active discussions with issuers about new PIN-debit relationships to help participants comply with final rules set by the Fed.”
Nelms further said that Discover is planning to launch a “broad” checking account product late in 2012.
Higher charge volume and improving credit quality helped boost Discover’s net income to a record $649 million, 2.5 times the $261 million in the year-earlier quarter. Credit card delinquencies fell to a record low of 2.43% of receivables and net card chargeoffs fell substantially to 3.85%.
