Discover is on the upswing

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After a string of several tough quarters, Discover, the smallest of the four major US card networks, made something of a comeback in 2016, especially in the year’s fourth quarter.

The firm posted loan growth across segments, driven largely by card growth — the largest segment of its business — as well as personal lending. And the firm is also seeing growing spend, which could point to a brighter future as the company readjusts before moving ahead.

The firm is effectively courting new customers, and they’re spending. The network’s total volume was up by 2% on a year-over-year (YoY) basis.

In 2016, the firm hit its highest number of new accounts since the recession. Like its peers, Discover always wants high credit-score borrowers. But it’s also focused on a segment it calls “revolvers,” which are customers that pay their bills on time, but not in full, which results in interest income. This is a good strategy in the short term, but it could be risky down the line, reflecting strong credit appetite in the US economy that could change and later hurt Discover.
At the moment, these additions are clear growth drivers for the firm. Discover’s loan growth is skewed 70-75% towards new accounts, CFO Mark Graf noted in the firm’s earnings call. And the firm’s purchase volume and spend is growing overall, which it hasn’t always been doing. Even more, PULSE, Discover’s debit segment that’s been the main drag on the firm’s business for multiple consecutive quarters, posted just a 1% decline in Q4, compared to 6% in Q3 and 15% in Q2, and is expected to return to growth at some point next year.
Discover is also managing to effectively navigate the card rewards debacle.

There's a rewards arms race afoot. Increased credit appetite is leading card networks to considerably up their rewards offerings in order to attract customers that may not have been previously interested in credit. That’s hitting issuers hard.
But Discover, which has warned about an "overheated" rewards market, according to The Wall Street Journal, appears to be taking a different approach. Their customer marketing, which has recently seemed to be focused on attracting lower-credit customers though channels like rewards or its credit scoring app, onboarding them to offerings like the Secured It Card, and then converting them to more lucrative products. This seems to be working — Discover’s loans and revenue grew at roughly the same pace in Q4 2016 — and could help put Discover ahead depending on the way the rewards game escalates moving forward.
Discover is just one piece of the broader payments ecosystem, which has grown to include merchants, acquirers, processors, issuers, and more.

John Heggestuen, director of research at BI Intelligence, Business Insider’s premium research service, has compiled a detailed report on the payments ecosystem that drills into the industry to explain how a broad range of transactions are processed, including prepaid and store cards, as well as revealing which types of companies are in the best and worst position to capitalize on the latest industry trends.

Here are some key takeaways from the report:

2016 will be a watershed year for the payments industry. Payments companies are improving security, expanding their mobile offerings, and building commerce capabilities that will give consumers a more compelling reason to make purchases using digital devices.
Payments is an extremely complex industry. To understand the next big digital opportunity lies, it's critical to understand how the traditional credit- and debit-processing chain works and what roles acquirers, processors, issuing banks, card networks, independent sales organizations, gateways, and software and hardware providers play.
Alternative technologies could disrupt the processing ecosystem. Devices ranging from refrigerators to smartwatches now feature payment capabilities, which will spur changes in consumer payment behaviors. Likewise, blockchain technology, the protocol that underlies Bitcoin, could one day change how consumer card payments are verified.
In full, the report:

Uncovers the key themes and trends affecting the payments industry in 2016 and beyond.
Gives a detailed description of the stakeholders involved in a payment transaction, along with hardware and software providers.
Offers diagrams and infographics explaining how card transactions are processed and which players are involved in each step.
Provides charts on our latest forecasts, key company growth, survey results, and more.
Analyzes the alternative technologies, including blockchain, which could further disrupt the ecosystem.
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