Worried about the volume of loans at a time when consumers are full of cash, Discover Financial Services has eased credit constraints it has placed on consumers’ card accounts during the pandemic and is investing money in marketing online and on social media to trigger borrowing activity.
CEO Roger Hochschild is looking for two things in the second half of the year: signs that consumers are running out of cash and will need credit, and a rebound in business travel. Longer term, he also keeps an eye out for newbie competitors such as buy now / pay later lenders.
Consumers are unlikely to change gears quickly, but Hochschild expects that by this fall some will start turning to loans again as stimulus payments and unemployment benefits start to decline.
“The high loan repayment rate that we are seeing is linked to the savings that households have built up as well as their overall liquidity thanks to government support, but as that support is withdrawn we expect growth. modest lending during the second half of this year, ”Hochschild said in an interview Thursday.
Discover, of Riverwoods, Ill., Reported a second quarter profit of $ 1.7 billion, down from a loss of $ 368 million a year earlier, helped by a release of loan loss reserves as payment defaults were at record levels.
Revenue soared 34% to $ 3.6 billion, helped by a windfall of a capital investment in the card issuing platform Marqueta, which raised $ 1.2 billion in an initial public offering in June. Discover started working with Marqeta over ten years ago.
Nonetheless, card receivables fell 2% year-on-year as payment rates hit an all-time high.
To promote borrowing and enroll new customers, Discover has removed “nearly all” of the credit crunch measures taken after the onset of the pandemic recession, Hochschild told analysts on a quarterly earnings conference call Thursday.
Discover also spent $ 46 million in the second quarter on a massive digital marketing campaign, driving operating expenses up 13% from the same period last year.
“We’re on Instagram and TikTok, where a lot of our clients are, given that our focus is on students in the student loan market,” Hochschild said in the interview.
However, he noted that rivals are taking similar steps as economic conditions improve.
“It comes back to a more normal level of competition, maybe a little increased, but more normal,” he told analysts, mentioning aggressive promotional efforts by some rivals. “But that’s part of the card business and what we’re used to competing against.”
One factor that generated revenue in the quarter was heavy travel spend on Discover cards in the spring and summer, which topped the same period in 2019. But that momentum is not expected to last, according to Hochschild.
“I think as people catch up with their trips and attend events that have been delayed, we’re going to see that travel spending stay high for a while, and obviously we’re not going to see retail sales. continue to grow 30% forever. He said in the interview.
Business travel has not rebounded in the same way, and international travel through Discover’s Diners Club International payment card arm targeting business travelers is still well below 2019 levels, Hochschild said. .
“We are cautiously optimistic that as more countries reopen we will see more cross-border travel starting this fall, but it is clear that the delta variant of the virus is raising some concern for travel spending. ‘business,’ he said.
So far, the installment loan phenomenon fueling the growth of buy it now / pay later businesses like Klarna, Affirm and Afterpay is not directly affecting Discover’s slow lending growth, Hochschild said, but the company closely monitors this category.
Earlier this month, Discover invested $ 30 million in Minneapolis-based BNPL company Sezzle after establishing a partnership earlier this year. Learn about plans to eventually add Sezzle as an option to consumers and expand connections to the more than 34,000 merchants Sezzle has integrated with.
“Installment loan users typically have credit scores below 650, which is lower than our traditional credit spectrum, but there may be opportunities for us, which is why we have taken this step with Sezgle.” , Hochschild said.
Pulse’s Discover throughput volume increased 19% year over year, increasing 33% from 2019 levels, as consumers leaned heavily on throughput during the pandemic period, Hochschild told analysts.
Diners Club’s sales volume increased 41% a year ago, but remained below 2019 levels, he said.
Student loans were up 4% from a year ago, while Discover’s personal loans were down 6% due to the credit crunch and high repayment rates, the company said.
Non-interest income increased $ 123 million, or 29%, from a year ago, while net discount and interchange income increased $ 102 million, or 43%, during the quarter, Discover said.