This article appears in the November 2009 issue of Cards&Payments.

The growth outlook for Discover Financial Services in the United States is somewhat bleak, given the stagnant condition of the credit card market caused by the economic downturn.

Though many consumers have shifted spending from credit to debit cards, Discover continues to rely heavily on credit cards for its profits. And, unlike many of its peers, Discover lacks a branch network to help drive new-account acquisitions, analysts say.

"The U.S. card market is quite mature, and Discover is not finding a lot of new customers here," says Megan Bramlette, managing associate with
Auriemma Consulting Group. "But Discover has a couple of things in its
favor—its customers are very loyal, and if Discover makes its cards more useful to those customers by enhancing international card acceptance, that's likely to help cement their loyalty."

Such things may become crucial in the next year as Discover struggles to
control its losses and stimulate cardholder spending among existing customers.

A series of hefty cash infusions from settlements last year in Discover's antitrust lawsuit against Visa Inc. and MasterCard Inc. has helped prop up the company's financial performance. Discover received $862 million last year and approximately $472 million each quarter so far this year as part of the $2.75 billion combined settlement. Discover claimed in a 2004 lawsuit that the card networks' exclusionary rules hampered its growth over many years.

Discover's domestic card-spending volume and third-party payments volume has been sluggish, however. Discover's U.S. card unit posted a 7% decline in Discover Card sales volume during the fiscal third quarter ended Aug. 31, to $22.8 billion from $24.6 billion a year earlier. Discover's managed net charge-off rate on credit card receivables rose to 8.39%, up 319 basis points from 5.2%, caused by rising consumer bankruptcies and higher unemployment rates. The delinquency rates on loans at least 30 days past due was 5.1%, up 125 basis points over 3.85% a year ago.

Total third-party payments segment volume totaled $36 billion during the quarter, up 2% from $35.3 billion. Volume for Discover's Pulse PIN-debit network decreased 1.1%, to $28.1 billion from $28.4 billion, while volume from third-party Discover card issuers fell 17.6%, to $1.4 billion from $1.7 billion.

Minus the litigation payments, which end this year, Discover's "ongoing
revenue model" will be thrust into a harsher light, says Red Gillen, an analyst with U.S.-based Celent.

Regardless of its international card-acceptance expansion plans, "Discover's main concern still has to be the ever-rising charge-off and delinquency rates," he says. "These two performance criteria are closely tied to unemployment rates, and we won't likely see an improvement in them until unemployment crests and begins to subside."

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