Discover Financial Services is stepping away from its recent M&A binge and trying to grow the old-fashioned way: by developing new businesses itself.
The Riverwoods, Ill., credit card company has been a frequent buyer in the past year as it tries to expand beyond its traditional roots in card lending and transaction processing. It has snapped up stray loan portfolios, online deposits and other assets from Citigroup, Tree.com and others.
But now Discover is refocusing on developing new businesses internally instead of buying them. It intends to launch a new online checking account at the end of 2012 and is currently "installing a computer system to support some of the features," chief executive David Nelms told ASR sister publication American Banker on Thursday.
Nelms declined to discuss many details of Discover's new checking product. He initially spilled the beans on a Thursday conference call with investors to discuss Discover's quarterly earnings, and told American Banker afterwards, "I'm kind of sorry I mentioned it at all!"
But he acknowledged some of the hurdles facing Discover as it looks to persuade customers to move their checking accounts online.
"Most consumers still have traditional branch checking accounts and we don't think that's going to change overnight," Nelms said in the interview.
Many banks are currently overhauling their checking accounts, adding new fees or cutting back on rewards in response to new regulatory caps on debit card interchange. Nelms cited those regulations as another reason Discover is waiting to unveil its checking account.
"It's good to wait a year because there's a lot of moving parts on pricing and features right now. In 12 months we'll have a lot better feeling of how it all shakes out and what consumers want," he said.
A Discover checking account would likely include a debit card, he said, and would be affected by the new rules restricting the fees that banks collect from merchants every time their customers pay with debit cards. But Nelms said those interchange restrictions could also become a silver lining for Discover as it markets its checking account to customers.
"To the extent that there are more fees on checking accounts, that could make it more attractive for consumers to go to a lower-cost direct model," he said. "The ideal account would have as few fees as possible and that would be one of the ways we would want to come in to attract customers."
Discover said earlier on Thursday that it more than doubled its third-quarter net income to $649 million, as its customers increased their spending and its credit card loan portfolio grew for the first time in over two years.
The company earned $1.18 per share in its fiscal third quarter ended Aug. 31. That compared with a profit of $261 million, or 47 cents per share, in the year-ago quarter.
Discover's quarterly credit card charge-off rate fell 388 basis points from a year earlier to 3.85%.
Its card loan portfolio grew 2% from a year earlier, in what was the first such year-over-year increase for Discover since the second quarter of 2009. Banks and credit card companies have seen their losses on bad loans fall since the worst of the financial crisis, but consumer demand for new loans has remained weak