No Letting up on the Merchant-Acquiring Throttle at Discover

As both a card issuer and payment card network, Discover Financial Services is feeling the sharp pinch of recession. Discover chief executive David Nelms indicated to analysts on Thursday that Discover would play a conservative game on the issuing side in 2009, but not necessarily so on the merchant side. “Our investment in new [cardholder] accounts will be lower, which is appropriate in this environment; however, our marketing efforts in connection with our U.S. merchant-acceptance initiative will be fully funded,” he said at an analysts' conference call to review Discover's fourth-quarter results and fiscal year ended Nov. 30. Nelms added that the integration of Discover with the Diners Club International network, which Discover bought in the past year, “remains a critical initiative.” Riverwoods, Ill.-based Discover in the past several years has recruited bank card merchant acquirers to sign merchants and card issuers to pump out Discover-branded cards. Those efforts have paid off in more network transaction volume, though volume has gotten decidedly soft of late. Discover Network transactions in the fourth quarter totaled 377.4 million, down 0.3% from 378.4 million in the year-earlier quarter and off 2.9% from 388.5 million in 2008's third quarter. Full-year Discover Network transaction volume rose 2% to 1.52 billion from 1.49 billion in fiscal 2007. Credit card sales volume fell 10.5% in the fourth quarter to $22 billion from $24.6 billion in the third, and was off by 2.6% from $23.5 billion a year earlier. Nelms and chief financial officer Roy A. Guthrie attributed a good part of the fall-off to the decline in gas prices as well as lower cardholder spending at retailers. Volume on the Discover-owned Pulse electronic funds transaction network took a surprising dip in the fourth quarter, falling 9.8% to 644 million transactions from 713.8 million in the third quarter, though still up 5.3% from 611.5 million in 2007's last quarter. Dollar volume on Pulse slipped 11.7% from the third to fourth quarters?$25 billion versus $28.4 billion, respectively. As with transactions, dollar volume still was up from the year-earlier period by 8.7%, when the EFT network handled $23 billion. For the year, Pulse dollar volume still rose 23% to $106 billion from $86.2 billion in 2007. Nelms, when asked by an analyst about what was going on at Pulse in the fourth quarter, would not give details other than to indicate it was a passing matter. “There were some anomalies in this particular quarter that I can't really go into,” he said, adding that he expects Pulse to return to double-digit growth rates in the first quarter, though not at as high a level as earlier because of the weaker economy. A bright spot was Diners Club, which posted volume of $7.47 billion in the fourth quarter, up 42.8% from $5.23 billion in the third. Total third-party and proprietary volume on Discover's networks rose 19% in fiscal 2008 to $220.8 billion from $185.5 billion in 2007. Total transaction volume hit 4.20 billion, up 11.3% from 2007's 3.77 billion. In an effort to increase its capital and liquidity with cardholder credit quality under stress, Discover disclosed that it would apply to the Federal Reserve to become a bank-holding company and that it would apply to the U.S. Treasury Department to sell stock to the government under Congress's financial-institution bailout program. Reports on the financial wires said Discover is eligible for up to a $1.2 billion investment. Nelms indicated that Discover would plow proceeds from its $2.75 billion antitrust settlements with Visa Inc. and MasterCard Inc. (Digital Transactions News, Oct. 28) into growing its business despite the current tough times that prompted a fourth-quarter increase of $521 million in reserves to cover potential loan losses. Boosted by $863 million in pre-tax settlement proceeds, Discover posted fourth-quarter net income of $432.3 million compared with $180 million a year earlier. Discover expects proceeds of $472 million each quarter in fiscal 2009 from the settlements. “We are positioning Discover to be one of only a handful of long-term winners in the payments industry,” Nelms said.