Is Discover’s Below-Average Growth In U.S. Card Purchase Volumes A Cause For Concern?

The six largest U.S. card issuers reported total Q2 purchase volumes of $566 billion for retail cards issued by them – representing more than 61% of the total credit card purchase volume of $927 billion for the U.S. in the quarter. Taken together, these six issuers saw purchase volumes increase by almost 11% year-on-year, which was better than the 10% growth witnessed by the overall industry. While Capital One continued to make the most of the surge in card usage to report a 17% increase in purchase volumes, Discover managed just 9% growth.

Discover and American Express stand out in this list of the largest card issuers due to their card-and-payments focused business models as opposed to the others, which are full-fledged banks. This makes growth in purchase volumes a critical metric for these two companies in terms of long-term value. However, we believe that the below-average growth in purchase volumes for Discover is not a cause for concern – especially since the company’s market share has largely remained constant at about 3.8% over the last few quarters. Also, as one of only two companies with end-to-end card processing capabilities, Discover stands to gain considerably over the coming quarters from upbeat market conditions. Because of this, we maintain a $89 price estimate for Discover’s shares, which is about 15% ahead of the current market price.

The credit card purchase volumes for individual issuers are taken from their respective quarterly earnings releases. Figures for American Express and Discover represent purchase volumes only for cards issued by them, with purchases made on AmEx or Discover-branded cards issued by other banks included in the total figure for the issuing bank. The total U.S. card purchase volume is as detailed by us in our previous article.

JPMorgan has a sizable lead over competitors in terms of card purchase volumes thanks to its position as the largest issuer of credit cards in the country. Citigroup displaced American Express from the second spot in Q3 2016, when the transfer of the Costco card portfolio was finalized, but the latter has done extremely well over recent quarters with its new merchant-focused growth strategy that aims to attract more merchants – in turn leading to faster customer growth. As a card-focused bank, Capital One’s rapidly growing card business will get an additional boost next year once it integrates Walmart’s card portfolio from Synchrony. Notably, these four card issuers now account for more than 50% of the total credit card purchases in the U.S.

However, Capital One’s rapid growth comes at a cost: The bank’s relaxed card lending standards are likely to result in higher card charge-off rates, and present a sizable downside in the event of a downturn. On the other hand, Discover’s conservative growth strategy gives up some of the short-term upside for long-term stability. That said, we expect Discover’s existing cardholders to spend more per card over coming months – something that should have a positive impact on total purchase volumes in subsequent quarters.

Details about how changes to outstanding card balances affect these issuers can be found in our interactive model for JPMorgan Chase | Bank of America | Wells Fargo | Citigroup | U.S. Bancorp | American Express | Discover

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