Discover Financial CEO Roger Hochschild is expecting big things from its payments business, particularly its PULSE debit card network, which it acquired in 2004.
In remarks during the company's recent earnings conference call last week, Hochschild said Discover is focused on improving PULSE's prospects despite many challenges facing the business.
"We would love to increase the percent of our earnings that comes out of the payment segment," Hochschild said Thursday. "We're battling for routing at the merchant level with Visa, MasterCard, day in and day out. We've seen a lot of growth from expanding from traditional PIN debit to card-not-present. And so, that's been particularly helpful. But we're very focused on growing that business."
Discover's payments business, which also includes Diner's Club and the Network Partners division, generates less than 10 percent of Discover's pre-tax income though it has the potential to be "substantially larger," according to analysts at William Blair.
"While we believe Discover's payments network is an underutilized asset, we are encouraged by partnerships with emerging fintechs (Sezzle/Marqeta)," the William Blair analysts wrote in an October 21 note to clients.
In July, Discover said it had invested $30 million in Sezzle, a provider of buy now-pay later installment payment services. The company also planned to expand the partnership to refer Sezzle customers to its credit and debit products.
Riverwoods, Illinois-based Discover, and rivals Visa and Mastercard are among the backers of the card payment processing start-up Marqeta, which went public in June. According to Discover, its 5.4 percent stake in Marqeta was worth more than $800 million when Marqeta's shares began trading.
"Certainly, we have a unique set of network assets and provide connectivity to merchants, whether through proxy card numbers or a series of other technologies and work closely with a number of fintechs around that," Hochschild said. "So that's at the core of some of what we do with Sezzle. Actually, that was the beginning of our relationship with Marqeta many, many years ago, and there are a lot of others that are either in the market now or that we're in discussions with."
Discover is accepted by 48 million merchants and at 99% of places that take credit cards in the United States.
Competition in the digital payments market is heating up as consumers grow increasingly accustomed to buying goods and services online to avoid the spread of the deadly COVID-19 virus. A study commissioned by Discover found that nearly three out of 5 of respondents used a digital payment platform as part of their daily spending.
"When Apple launched their Wallet, even PayPal, the vast majority of their volume was processed through existing payment networks," Hochschild said. "And debit processing is incredibly complex and, quite frankly, very low margin. I don't see anything in the near- or even medium-term that looks like it has the potential (to disrupt our business)."
Discover's Payments business volume rose 10 percent to $76.8 billion in the most recent quarter, fueled by gains at PULSE, Diners Club, and Network Partners, which provides payment transaction processing and settlement services on the Discover Network. The higher revenue offset the $114 million loss Discover's Payments Services business reported in the quarter.