Author Archives: mronan

Discover 2Q11 financials: leading indicators for other credit card issuers

Discover Financial posted second quarter 2011 financials this morning.  As Discover reports quarterly financials a month before other leading card issuers, we look to its financials to get an early read on broader trends in the credit card industry

The following summarizes some key credit card metrics in Discover 2Q11 financials:

  • Charge-off rate: continued to improve, with a decline of 95 bps in the quarter to 5.01%
  • Delinquency rate: the 30+ day delinquency rate fell 80 bps to 2.79% (Discover reported this as an all-time low)
  • End-of-period loans: fell 1% y/y, but this decline is tailing  off (y/y was was 3% in 1Q11)
  • Volume: Discover Card sales volume rose 9% y/y, while total Discover Card volume grew 11%

Discover does not break out revenue and provision for loan loss figures for its credit card operations, but rather reports them for the total company.

  • Net interest income: rose 4% y/y, with a 1% rise in interest income, and a 6% fall in interest expense
  • Other income: increased 6% y/y, driven in part by a 16% rise in loan fee income
  • Provision for loan losses: fell 76% y/y to $176MM

In summary, we are seeing a continuation of recent trends: improvement in credit quality metrics; spending but no loan growth; and profitability driven by lower provisions for loan losses, rather than revenue growth.

However, with charge-off rates now close to 5% and 30+ day delinquency rates at an all-time low, Discover is shifting its focus to growing outstandings.  It reported that the decline in outstandings is bottoming out, and it anticipates growth in the coming quarters. And to push this growth, Discover grew marketing spend 27% y/y in 2Q11.

However, issuers’ interest in growing outstandings is limited by continued weak consumer demand.  This is leading to some issuers to looking to acquire card portfolios (e.g., Capital One’s recent private-label portfolio acquisitions, and its bid for HSBC’s U.S. card portfolio), or refocusing attention on acquiring non-card loan portfolios (note Discover’s own recent acquisitions of Tree.com’s Home Loan Center, as well as its earlier acquisition of The Student Loan Corporation from Citigroup).

Opportunities and challenges in mobile payments

In recent weeks, we have seen mobile payment launches by Google and Square.  These follow the creation of the Isis joint venture by AT&T Mobile, T-Mobile and Verizon Wireless.  Many of the leading banks (including Bank of America, Wells Fargo and U.S. Bank) are currently conducting mobile payment trials.  And a series of smaller players (e.g., Dwolla, Boku, Propay) have recently introduced mobile payment apps.

Mobile payments have the potential to capture to a significant share of spending in the coming years.  However, there are significant challenges to overcome in order to realize this potential.  These include:

  • Consumer privacy and security
  • Technological functionality and interoperability
  • Revenue-sharing among stakeholders: There are a diverse range of companies looking to gain a share of the emerging mobile payments market, including: banks; payment networks; payment processors; payment app providers; smartphone manufacturers; communications service providers; and merchants.  Each of these companies bring strengths and limitations to the table, and no one company can go it alone.  So, an effective and sustainable mobile payments model will need the involvement of multiple partners, each of whom will need to earn a return commensurate with their contribution.
  • Changing consumer behavior: Consumer spending patterns change over time, and consumers are moving away from paper-based payment methods and towards cards and electronic payments.  However, consumers’ payment usage patterns alter more gradually than many would expect (according to The Nilson Report, by 2015, checks will still account for 12% of consumer payment volume).  To encourage consumers to switch to mobile payments, marketers will need to:
    • Identify and target consumer segments with greatest interest in using mobile payments
    • Develop a value proposition and user experience for mobile payments
    • Determine which merchant categories would be most receptive to mobile payments
    • Identify which payment methods are most vulnerable to being dislodged by mobile payments, and clearly articulate mobile payments’ advantages to consumers and merchants
    • Create incentives to encourage first-time and repeat usage by consumers
  • Merchant acceptance: contactless payments have been around for some time, but fewer than 150,000 U.S. merchants can accept such payments, compared to the approx. 6 million merchants that can handle card transactions.  Many merchants will balk at the cost of equipping their point-of-sale terminals to accept mobile payments.  To overcome this, mobile payment stakeholders will need to:
    • Develop technology solutions that reduce the cost of mobile payment acceptance
    • Market the benefits of mobile payments to merchants, so that they are more willing to make the investment in mobile payment acceptance

More banks launch initiatives for National Small Business Week

Earlier this month, we posted a blog on small business initiatives from Citi, TD Bank and Wells Fargo, which were introduced in advance of National Small Business Week. As National Small Business Week is taking place this week, other leading banks have also introduced new small business initiatives.

  • Chase introduced a number of initiatives, including incentives of up to $1,000 for new small business checking customers, as well as Instant Storefront from Chase, a solution that enables small businesses sell products online.
  • Bank of America launched a suite of small business charge cards (see our blog on this launch).  In addition, the bank has partnered with SCORE to develop a five-part series of three-hour workshops for small businesses, entitled “Simple Steps for Starting Your Business.”
  • Capital One partnered with Better Business Bureau to introduce Managing Credit – Made Simpler, a set of resources to help small businesses to manage credit.
  • American Express OPEN introduced AdManager, a tool to help small businesses manage online advertising campaigns

It is notable that the number of small business campaigns is much larger this year than it was for National Small Business Week in 2010, reflecting the improved economy over the past year, as well as banks’ renewed interest in the small business market.