Discover Card Profits Decline 11.5% in 3Q/03

Morgan Stanley reported this morning that its Credit Services division, including the “Discover Card,” posted lower net income for the third quarter compared to 3Q/02. Net income of $185 million was off 11.5% compared to one-year ago and down 4.6% compared to second quarter 2003 profits of $194 million. However, third quarter profits were up $3 million over 1Q/03 net income. Managed credit card loans at the end of the third quarter end rose 60 basis points to $49,965,000,000. The interest rate spread was unchanged at 8.91%, but the interest yield declined 92 basis points. Transaction volume rose 2% from a year ago, to $24.8 billion, driven by a 6% increase in sales. Account growth was flat, but active accounts declined more than 6% from 3Q/02. MS reports that merchant and cardholder fees were essentially unchanged at $523 million as higher merchant discount fees from increased transaction volume were offset by lower cardholder late fees. The managed credit card net charge-off rate increased to 6.90%, 83 basis points above a year ago, and 40 basis points above last quarter. The over-30-day delinquency rate was 6.05%, 33 basis points above last year but 16 basis points below last quarter. MS says sustained high levels of U.S. bankruptcy filings and unemployment along with changes in the Company’s account re-aging policy, which tightened terms under which delinquent accounts are returned to a current status, negatively affected the charge-off and delinquency rates. For complete details on Discover’s third quarter performance visit CardData (www.carddata.com).

DISCOVER CARD PORTFOLIO SNAPSHOT
3Q/02* 4Q/02* 1Q/03* 2Q/03* 3Q/03* Y/Y CHNG
Outstandings:$49.7b $51.1b $51.8b $50.9b $50.0b +0.6%
Volume: $24.3b $25.3b $26.1b $24.0b $24.8b +2.0%
Accounts: 46.2m 46.5m 46.5m 46.4m 46.3m +0.2%
Actives: 22.8m 22.6m 22.3m 21.8m 21.3m -6.6%
Chargeoffs: 6.07% 5.96% 6.17% 6.50% 6.90% +83bps
Delinquency: 5.72% 5.96% 6.33% 6.21% 6.05% +33bps
Yield: 12.86% 12.45% 11.78% 11.97% 11.94% -92bps
2Q/02 ended 5/31/02; 3Q/02 ended 8/31/02; 4Q/02 ended 11/30/02; 1Q/02 ended 2/28/03;
2Q/03 ended 5/31/03; 3Q/03 ended 8/31/03.
Source: CardData (www.carddata.com)

Details

VISA Takes a Swing at MC, AmEx, and FDC

VISA’s top executive came out swinging at American Express, MasterCard, and First Data yesterday at the ABA/Foreward Financial’s Bank Card Conference in Dallas. CEO Carl Pascarella indicated that if VISA’s “210e” bylaw is forever banned, which prohibits members from issuing AmEx and Discover cards, VISA will aggressively take on American Express in the commercial products market at a new level of competition. He also warned members of the “cross-selling threat” posed by AmEx if members open their consumer and commercial customer bases to AmEx. Pascarella reiterated that MasterCard’s recent court motion to stop VISA’s “Settlement Service Fee” policy, in regard to the recent Wal-Mart debit card settlement, has absolutely no merit and is purely an “opportunistic” move by MasterCard to recover from its missteps in the off-line debit card market over the past decade. VISA said MasterCard was “asleep at the switch,” failed to see the coming explosion in off-line debit, focusing instead on building its “Maestro” PIN-debit program. Pascarella then turned to publicly-traded processors who he said are more interested in “satisfying Wall Street” than “supporting financial institutions.” Although not directly referring to First Data, he said publicly-traded processors are causing disinter mediation at the point-of-sale. He said VISA is best suited to balance the needs of merchants and consumers with the needs of its members.

Details

BioPay Launches bCheck in Maryland and Virginia

VA-based BioPay has rolled-out its “bCheck” biometric payment service at nearly two dozen retail locations in Northern Virginia and Maryland. The system enables consumers to use their finger image to authorize a debit from checking account.M To use “bCheck,” customers simply enter their phone number and place their finger on the scanning device to confirm their purchase amount. Yesterday’s announcement represents the largest cluster of businesses using biometric payment systems anywhere in the USA. The company says “bCheck” transaction costs are 75% less than the costs of credit card and off-line debit transactions.

Details

RBA REFORMS DECISION

Justice Brian Tamberlin of the Federal Court ruled that the Reserve Bank of Australia’s credit card reforms are valid, thus rejecting VISA’s and MasterCard’s arguments to the contrary. The judge rejected the VISA and MasterCard claim that they are not a “designated payments system” and therefore not subject to RBA regulatory power. However, Tamberlin did not rule on whether the reforms are sound policy, that could impact bank earnings and possibly make the country less attractive for new entrants. Tamberlin did note that he was also not persuaded that the RBA failed to engage in a proper decision making process or misapplied the legislation. Last year, the RBA issued new reforms on the credit card business permitting merchants to recover from cardholders the costs of accepting credit cards. The new standard went into effect January 1st. Also under the new RBA rules, interchange fees will decrease from around 95 basis points to approximately 55-60 basis points by October 1st. The new interchange rates will cost bank credit card issuers an estimated US$300 million per year. At mid-year 2003, Australians owe a record $24.24 billion in credit card debt among 10,705,000 total credit card accounts. VISA and MasterCard are also facing possible regulation of interchange fee practices in the UK, Poland, Switzerland, and New Zealand.

Details

VISA and MasterCard Lose Battle Over Australian Card Reforms

Justice Brian Tamberlin of Australia’s Federal Court ruled Friday that the Reserve Bank of Australia’s credit card reforms are valid, thus rejecting VISA’s and MasterCard’s arguments to the contrary. The judge rejected the VISA and MasterCard claim that they are not a “designated payments system” and therefore not subject to RBA regulatory power. However, Tamberlin did not rule on whether the reforms are sound policy, that could impact bank earnings and possibly make the country less attractive for new entrants. Tamberlin did note that he was also not persuaded that the RBA failed to engage in a proper decision making process or misapplied the legislation. Last year, the RBA issued new reforms on the credit card business permitting merchants to recover from cardholders the costs of accepting credit cards. The new standard went into effect January 1st. Also under the new RBA rules, interchange fees will decrease from around 95 basis points to approximately 55-60 basis points by October 1st. The new interchange rates will cost bank credit card issuers an estimated US$300 million per year. At mid-year 2003, Australians owed a record $24.24 billion in credit card debt among 10,705,000 total credit card accounts. VISA and MasterCard are also facing possible regulation of interchange fee practices in the UK, Poland, Switzerland, and New Zealand.

Details

Scotiabank Becomes Fifth Largest Private Bank

Scotiabank has inked a deal to more than double the size of its operations in the Dominican Republic and to become the fifth largest private bank in the country. The transaction agreements provide for the purchase of 39 branches and the hiring of 460 employees of Baninter. The transaction also includes
the purchase of selected credit card, personal and commercial loans. Acquired branches will be converted into Scotiabank locations over the next three months and will supplement the Bank’s existing 20-branch Dominican network.

Details

Off-Shoring Jobs to India May Cause Irreparable Harm

A new study shows that off-shoring jobs to India may cause irreparable damage to a financial service firm’s brand image. The research by Amicus found that 62% of respondents said that choosing a life or insurance product would be influenced whether or not the provider off shored or not. Nearly 90% believed that cost savings were not being transferred to the customer and an overwhelming majority believed data protection was being compromised. Amicus says that many companies have been outsourcing jobs for the last 18 months to places like Bangalore and Mumbai in India where they can make up to 40% cost savings because of low rates of pay for sophisticated IT and call center workers. Deloitte Consulting believe 2 million jobs will be exported from the West to India by 2008.

Details