Seems cardholders aren't the only ones getting paid to discover. Discover Financial Services is best known for issuing Discover-brand credit cards, which are used by more than 25 million members. The company's cards, which include several levels of business and consumer accounts, repay cardholders a percentage of the purchase price each time they use their cards. Discover also licenses Diners Club credit cards, which are accepted in more than 185 countries. But there's more to this business than just plastic. The company also offers direct banking services, issues student and personal loans, and runs the PULSE Network ATM system.
Discover reported record net income in 2011, buoyed by higher volume in its card and ATM operations, growth in its student and personal loan portfolios, and historically low loan delinquencies and charge-offs. The company did encounter a setback, however, when it made a move to grow its banking business by arranging to buy more than $1 billion of deposits from Allstate Bank. That deal fell through after Discover was unable to get regulatory approval to complete the transaction. In a separate deal, the company in 2012 bought Home Loan Center, the mortgage origination operations of Tree.com, for nearly $56 million.
Meanwhile, Discover has also been busy building its international business. The company has reciprocity alliances with card issuers in countries such as Canada, China, France, Germany, Japan, South Korea, and the UK to increase its cards' acceptance in those markets and to provide cardholders in those countries to gain global payment acceptance through Discover's network. In 2012 Discover issued its first cards outside the US (in Ecuador) and entered into an alliance with National Payments Corporation to increase network acceptance in India.
Discover boosted its lending operations in 2010 with its $600 million purchase of Citibank's 80% stake in Student Loan Corporation. It also acquired a $4.2 billion portfolio of private student loans from Citibank. The company later divested its portfolio of federal student loans after the government overhauled its lending program and became the sole provider of government-backed student loans in 2010. The following year, Discover bought another $2.5 billion in student loans from Citibank. The company plans to ramp up its student and personal lending.
In response to federal legislation meant to protect consumers from unfair billing practices (the Credit Card Accountability, Responsibility, and Disclosure, or CARD, Act), Discover Financial increased annual percentage rates and converted many accounts from fixed to adjustable rates. It has also added to its number of partnerships with retailers and restaurants to enhance its customer rewards programs to encourage card usage.
Morgan Stanley spun off Discover Financial Services in 2007. A similar move had been announced in 2005, but Morgan Stanley pulled the plug on that earlier attempt amid market turmoil. In 2008 Discover settled antitrust litigation with its chief rivals for some $2.75 billion. In the suit, the company had claimed that Visa and MasterCard had illegally barred their member financial institutions from issuing Discover cards.
To gain access to federal funds made available through the Troubled Asset Relief Program (TARP), Discover Financial converted to a bank holding company in 2009. It received $1.2 billion from the program, which it repaid the following year. – less