Which Credit Card Giant Is In Better Shape: Discover Financial Or American Express?

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DFS: Discover Financial Services logo
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Discover Financial Services

Discover Financial (NYSE: DFS) and American Express (NYSE: AXP) are leading credit card companies which operate a closed-loop payment processing network (i.e. they issue cards, and also process payments on their network).  The revenue share of Discover’s credit card operations has increased considerably over the last decade – from around 43% of Discover’s Total Revenues in 2008 to over 78% in 2018. On the other hand, American Express’ has a sizable credit card business with an average revenue share of 84% over the last decade.

Notably, American Express offers both consumer and commercial credit card products, whereas Discover Financial offers only consumer credit card products. Hence, we have only considered American Express’ consumer card business for this analysis. Trefis captures trends in the credit card business for Discover Financial and American Express in an interactive dashboard and concludes that while American Express has a larger consumer credit card business both in terms of card transaction volume and fees per dollar of transaction volume, Discover has consistently maintained higher profit margins. Further, Discover Financial has delivered a better return on credit card loans and has higher outstanding consumer card balances.

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American Express has significantly higher revenues than its peer, although Discover Financial has shown steady growth rate over the last 4 years.

  • Although American Express has reported significantly higher consumer credit card revenues than its peer over the last 4 years, its revenues have reduced 10% as compared to the 23% increase in Discover Financial’s figure.
  • American Express’ consumer credit card business is bigger than its peer, especially when in terms of card transaction volume.
  • However, its segment revenues decreased by 10% from $23.8 billion in 2015 to $21.5 billion in 2018. This decrease could be attributed to a 25% y-o-y drop in the company’s revenues in 2016 after Costco ended its partnership with Amex.
  • Going forward, we expect Discover Financial’s consumer credit card revenues to improve 15% and cross $9.6 billion by 2020, whereas American Express is expected to report $25 billion in segment revenues – up by 16%.
  • This growth of 15% in Discover Financial’s consumer credit card revenues would be driven by higher net interest income from credit card loans due to an expected increase of 16% in the segment’s outstanding credit card balances. On the other hand, American Express’ growth would be supported by a 17% jump in transaction volume.

Our interactive dashboard for Discover Financial details the factors that have driven changes in revenues of Discover Financial’s individual revenue streams over recent years along with our forecast for 2019-2020.

 

Consumer credit cards contributed more than 78% to Discover Financial’s revenues in 2018 as opposed to a figure of 53% for American Express

  • Discover Financial’s consumer credit card revenues have averaged around 78% of total revenues, while American Express’ figure was lower at 53% of total revenues.
  • This implies that Discover Financial is more heavily dependent on its consumer card business, as compared to its peer.

 

Discover Financial’s outstanding card balances in 2018 were 6% larger than American Express’ consumer card portfolio

  • Discover Financial’s outstanding card balances were almost 19% less than American Express’ figure in 2015.
  • However, the latter reported a 24% drop in its outstanding card balance in 2016 due to the loss of its Costco co-branded loan portfolio to Citigroup, allowing Discover to overtake Amex by 12%.
  • Thereafter, American Express’ outstanding card balances have trended higher in subsequent years with Discover Financial maintaining an average lead of 9% over 2016-2018.
  • Discover Financial’s outstanding card balances have increased from $54.8 billion in 2015 to $68 billion in 2018, and are expected to grow 16% to cross $78.5 billion by 2020. On the other hand, American Express is expected to report $76.3 billion by 2020 – up by 19% y-o-y.

 

Also, Discover Financial’s net interest yield from consumer credit card loans was 4 bps more than American Express’ figure in 2018

  • Discover Financial has reported a higher net interest yield from consumer credit card loans than American Express over each of the last four years – a trend we believe will continue over 2019-2020.
  • This can be attributed to the fact that Discover has access to cheaper funding (deposits) due to its consumer lending business, and also because Amex maintains a sizable portfolio of charge cards that do not earn any interest income.

 

American Express’ consumer card transaction volume was 3.5x of Discover Financial’s figure in 2018

  • Card transaction volume is the dollar value of total purchases made on credit cards.
  • American Express’s consumer card transaction volume was around 3.5x of its peer’s over each of the last 3 years.

Additional details about how the consumer card transaction volume for Discover Financial and American Express has grown over the years are available in our interactive dashboard.

 

Similarly, American Express generates significantly higher card fees on every dollar in card volume

  • While Fees as a % of consumer card transaction volume has decreased for Discover Financial, American Express’s figure has shown positive movement over the recent years.
  • Discover Financial’s fees as a % of consumer card transaction volume were 0.65% in 2018, which was less than one-fourth of American Express’s figure of 2.87%.
  • As a result of this stark difference in fees percent, the latter has generated significantly higher fees income than Discover Financial over each of the last four years.

Our interactive dashboard captures trends in card fees per dollar in consumer card volume for Discover Financial and American Express over the years.

 

Discover Financial’s consumer card business has much better margins than American Express’

  • Higher outstanding card balances, better return on credit card loans and lower non-interest expenses have helped Discover Financial’s consumer credit card division’s pre-tax margin average around 36.5% over the last four years, which was higher than the 21.8% average pre-tax margin of American Express.
  • Discover Financial’s consumer card business reported a pre-tax margin of 32.2% in 2018 – significantly higher than American Express’ figure of 17.3%.
  • While both companies reported a decrease in their operating margin over 2015-2017, Discover Financial’s figure reduced due to higher provisions for card loan losses while American Express’ margins suffered due to an increase in non-interest expense for consumer credit card division.

 

CONCLUSION: Although American Express’ consumer credit card business is larger, Discover’s operations have better profitability

  • Although American Express has a larger consumer credit card business both in terms of card transaction volume and fees per dollar of transaction volume, it has lower profit margins compared to Discover Financial.
  • Further, Discover Financial has delivered a better return on credit card loans and has higher outstanding consumer card balances.
  • Discover Financial only offers consumer credit cards which accounts for more than 78% of its revenues. On the other hand, American Express derives around 58% of its revenues from this segment. Further, it also offers commercial credit cards that are not included in this analysis.
  • That said, the difference in credit card revenues for both the companies is huge, and given the higher card transaction volume and better fees per dollar of transaction volume for American Express, it is unlikely that Discover will cross American Express’ scale over the foreseeable future.

 

Trefis estimates Discover Financial’s stock (shows cash and valuation analysis) to have a fair value of $90, which is 10% more than the current market price.

 

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