--Discover initially offering checking accounts to existing
credit-card holders
--Company is trying to build out its online bank to compete with
branch-based banks
--Company has added student loans, personal loans and mortgages
in recent years
(Updated with executive comments, analyst comment and new
details throughout.)
By Andrew R. Johnson
Discover Financial Services (DFS) is adding checking accounts to
its array of financial-services products as it looks to leverage
its national credit-card brand to take on branch banks.
The online accounts are expected to help Discover further
broaden its base of consumer deposits, which provide a cheap source
of funding for its loans. The company, known best for its cash-back
credit cards, has also been trying to extend its reach by offering
savings accounts, student loans and, most recently, mortgages.
"Our strategy objective is to be the leading direct bank," Roger
Hochschild, president and chief operating officer of Discover, said
in an interview.
Like its credit cards, Discover's checking accounts will come
with a rewards program that will earn customers cash back on
purchases. They will earn 10 cents for every debit-card purchase,
online bill payment and check they write, the Riverwoods,
Ill.-based company said Wednesday.
Many banks have eliminated rewards programs tied to debit-card
purchases and raised monthly fees on checking accounts in the wake
of the Durbin Amendment, a provision in 2010's Dodd-Frank financial
overhaul legislation that cut in half the fees debit-card issuers
receive from merchants when a customer makes a purchase. Those fees
are one of the primary ways banks fund rewards programs.
"I think the rewards are unique, especially in an environment
where issuers have cut back on debit rewards," Mr. Hochschild
said.
Discover said its accounts, which it has long planned to make
available, will not carry monthly fees or minimum balance
requirements, and will come with free checks. The accounts
initially will be available to a "limited number" of Discover
credit cardholders by invitation only and will be rolled out to all
cardholders this year. It plans to make them available to
noncustomers in 2014.
Checking accounts add to the growing list of financial products
Discover has rolled out in recent years to diversify beyond
credit-card lending, its biggest source of revenue.
While Discover is one of the few credit-card lenders
experiencing consistent loan growth, the industry in general has
been plagued by tepid borrowing as consumers have largely worked to
pay down debt since the recession.
The company also offers savings accounts and certificates of
deposit, as well as student loans, personal loans and mortgages.
Discover originated about $2 billion in home loans during the
second half of last year, Mr. Hochschild said.
The company is aiming to wrestle away customers from
branch-based banks by marketing directly to consumers online, which
it says allows it to offer products more cheaply than its big-bank
competitors. Other lenders have also gone the online route in hopes
of capturing business from consumers who are comfortable doing
their banking through websites and mobile applications in lieu of
visiting a branch.
Discover said its checking-account customers will have access to
a mobile app that lets them deposit checks, make bill payments and
locate ATMs.
The disappearance of the ING Direct brand, one of the more
successful online banking brands, provides an opportunity for
Discover, Mr. Hochschild said. Capital One Financial Corp. (COF)
acquired ING Groep NV's (INGA.AE, ING) U.S. online banking business
last year and has since rebranded the business as Capital One
360.
The ING Direct brand "had been relatively strong," he said.
"Having that go away I would view as a good thing for us."
However, he said he expects most customers that Discover's bank
acquires to come from "more-traditional banks as opposed to
existing online ones."
The challenge for Discover is getting consumers to view it as
more than a credit-card company, said Donald Fandetti, an analyst
with Citigroup Inc.
"One hurdle would be...educating the consumer that these
products are available," Mr. Fandetti said. "They have a very
strong card business and a growing student-lending business, so all
of this ... is kind of additive."
Offering additional deposit products allows the company to grow
a cheap funding source for its loans. Other lenders, including
American Express Co. (AXP), Capital One and CIT Group Inc. (CIT),
have increased their reliance on deposits since the financial
crisis.
Discover Chairman and Chief Executive David Nelms said in
December lowering its cost of funds was "our reason for launching"
checking accounts.
"We don't expect this to necessarily make money as a product,
except that it's going to be over time a good, low-cost, stable
source of funds," Mr. Nelms said during a conference call.
Discover had $27.9 billion in direct-to-consumer deposits as of
Nov. 30.
Discover's shares were up 1.5% at $38.38 in recent trading. The
shares are down 0.5% this year.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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