Discover Financial Services, through its subsidiaries operate as a digital banking and payment services company.
The company provides digital banking products and services and payment services through its subsidiaries. The company offers its customers credit card loans, private student loans, personal loans, home loans and deposit products. The company also operates the Discover Network, the PULSE network (PULSE) and Diners Club International (Diners Club), collectively known as the Discover Global Network. The Discover Network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as merchant acceptance throughout the United States of America (U.S.) for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded charge cards and/or provide card acceptance services.
The company operates through two segments: Digital Banking and Payment Services.
Digital Banking segment includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals on the Discover Network and other consumer banking products and services, including private student loans, personal loans, home loans and deposit products.
Payment Services segment includes PULSE, Diners Club and its Network Partners business, which provides payment transaction processing and settlement services on the Discover Global Network.
The company principally engages in providing products and services to customers in the U.S. However, the company also receives revenue from sources outside of the U.S., including royalty and licensee revenue from its Diners Club licensees and network assessment, discount and interchange fees from its network-to-network partners (Network Alliances).
The company offers and issues credit cards to consumers. The company’s credit card customers are permitted to revolve their balances and repay their obligations over a period of time and at an interest rate set forth in their cardmember agreements, which may be either fixed or variable. The company also charges customers other fees as specified in the cardmember agreements. These may include fees for late payments, returned checks, balance transfer transactions and cash advance transactions.
The company’s credit card customers’ transactions in the U.S. are processed over the Discover Network. The company receives discount and fee revenue from merchants with whom it has a direct relationship.
Private Student Loans
The company’s private student loans are primarily available to students attending eligible non-profit undergraduate and graduate schools. The company also offers parent loans and certain post-graduate loans, including consolidation, bar study and residency loans. All of its private student loans are unsecured and have terms and conditions that vary by type of student loan. The company encourages students to borrow responsibly and maximize grants, scholarships and other free financial aid before taking student loans.
The company’s private student loans feature fixed or variable interest rates with zero origination fees. Customers can elect to make extra payments to pay their loans off earlier than contractually scheduled without penalty. The loans can feature potential rewards, such as for earning good grades, and the company also offers optional in-school payment features where students make payments while in school. The standard repayment period is 15 to 20 years, depending on the type of student loan.
The company markets its private student loans primarily through digital channels, direct mail, email and media advertising. The company also works with schools to create awareness of its products with students and their families. Students can apply for its private student loans online or by telephone and the company has dedicated staff within its call centers to service private student loans. The company invites applicants who qualify to apply with a creditworthy cosigner, which may improve the likelihood of loan approval and a lower interest rate.
The company’s personal loans are primarily intended to help customers consolidate existing debt, although they can be used for other purposes. These loans are unsecured with fixed interest rates, terms and payments, and have zero origination fees. The repayment period for personal loans is 3 to 7 years and there is no penalty for prepaying any portion of a personal loan balance.
The company markets personal loans primarily through direct mail, digital channels and email. Prospective applicants can obtain information regarding Discover Personal Loans and complete an application either online or by telephone.
The company’s home loans are intended for multiple purposes, including mortgage refinance, debt consolidation, home improvement and other major expenses. These loans are closed-end with fixed interest rates, terms and payments, and are secured by a first or second lien on a customer’s home. These loans require monthly payment over a 10 to 30-year term. Customers may elect to make larger than minimum payments without being subject to a prepayment penalty. Customers do not pay origination fees or third-party costs during the application process or at closing, but they may be required to reimburse certain third-party costs if the loan is repaid in full within three years.
The company markets home loans primarily through direct mail, digital channels and email. Prospective applicants can obtain information and apply online or by telephone.
The company obtains deposits from consumers directly or through affinity relationships (direct-to-consumer deposits). Additionally, the company obtains deposits through third-party securities brokerage firms that offer its deposits to their customers (brokered deposits). The company’s direct-to-consumer deposit products include savings accounts, certificates of deposit, money market accounts, IRA savings accounts, IRA certificates of deposit and checking accounts, while its brokered deposit products include certificates of deposit and sweep accounts. All of its deposits are insured by the Federal Deposit Insurance Corporation (the FDIC) to the maximum permitted by law.
The company markets its direct-to-consumer deposit products through the use of digital channels, direct mail, print materials, email and arrangements with third parties.
The company’s PULSE network is a leader in debit payments, cash access and account transfers. PULSE links cardholders served by financial institutions to ATMs and point-of-sale (POS) terminals located throughout the U.S., including cardholders at financial institutions that PULSE has direct relationships and through agreements PULSE has with other debit networks. PULSE also provides cash access at ATMs internationally.
PULSE’s primary source of revenue is transaction fees charged for switching and settling ATM and debit transactions initiated through the use of debit cards issued by participating financial institutions. In addition, PULSE offers a variety of optional products and services that produce income for the network, including signature debit transaction processing, debit card fraud detection and risk mitigation services and connections to other regional and national electronic funds transfer networks.
When a financial institution joins the PULSE network, debit cards issued by that institution are eligible to be used at all of the ATMs and POS debit terminals that participate in the PULSE network and the PULSE mark can be used on that institution’s debit cards and ATMs. In addition, financial institution participants may sponsor merchants, direct processors and independent sales organizations to participate in the PULSE POS and ATM debit service. A participating financial institution assumes liability for transactions initiated through the use of debit cards issued by that institution, as well as for ensuring compliance with PULSE’s operating rules and policies applicable to that institution’s debit cards, ATMs and, if applicable, sponsored merchants, direct processors and independent sales organizations.
The company’s Diners Club business maintains a global acceptance network through its relationships with licensees, which are generally financial institutions. The company do not directly issue Diners Club cards to consumers, but grant its licensees the right to issue Diners Club-branded cards and/or provide card acceptance services. The company’s licensees pay the company royalties for the right to use the Diners Club brand, which is its primary source of Diners Club revenues. The company also earns revenue from providing various support services to its Diners Club licensees, including processing and settlement of cross-border transactions. The company also provides a centralized service center and technological services to its licensees.
When Diners Club cardholders use their cards outside the host country or territory of the issuing licensee, transactions are routed and settled over the Diners Club network through its centralized service center. In order to increase merchant acceptance in certain targeted countries and territories, the company works with merchant acquirers to offer Diners Club and Discover acceptance to their merchants. These acquirers are granted licenses to market the Diners Club and Discover brands to existing and new merchants. Diners Club cardholders with cards issued by licensees outside of North America continue to use their cards on the Discover Network in North America and on the PULSE and Diners Club networks in their card-issuing territory and abroad.
Network Partners Business
The company has agreements with a number of financial institutions, including financial technology firms, networks or Network Alliances and commercial service providers for issuance of products or processing of payments on the Discover Global Network (i.e., Discover Network, PULSE and Diners Club). The company refers to these financial institutions, networks and commercial service providers as Network Partners. The company may earn merchant discount and acquirer assessments net of issuer fees paid, in addition to other fees, for processing transactions for Network Partners. The company also leverages its payments infrastructure in other ways, such as business-to-business payment processing.
The company’s Network Partners business consists of Network Alliances, technology-enabled partners and its commercial payments network. Network Alliances allow Discover-enabled cards to be used at other networks’ participating merchants and allow other networks’ participating issuers’ cards to be used at Discover Network merchants. The company’s commercial payments network facilitates transactions and business-to-business payments between buyers and suppliers using the existing payment infrastructure of Discover Network.
The operation of its Payment Services segment requires that the company invests in the technology to manage risk and service network partners, merchants and merchant acquirer relationships. The company also makes strategic investments in payment services entities to support its Payment Services segment.
Account Acquisition (New Customers)
The company acquires new credit card customers through direct mail, internet, media advertising, merchant or partner relationships, or through unsolicited individual applications. The company also acquires new private student loan, personal loan and home loan customers through similar channels. In all cases the company has a rigorous process for screening applicants.
The company’s credit risk management and marketing teams use proprietary analytical tools to match its product offerings with customer needs and identify creditworthy prospective customers. The company considers the prospective customer’s financial condition and stability, as well as ability and willingness to pay.
The company assesses the creditworthiness of each consumer loan applicant by evaluating an applicant’s credit information provided by credit bureaus and information from other sources. The assessment is performed using its credit scoring systems, both externally developed and proprietary. For its unsecured lending products, the company also uses experienced credit underwriters to supplement its automated decision-making processes. For its home loan products, experienced credit underwriters must review and approve each application.
Portfolio Management (Existing Customers)
The revolving nature of its credit card loans requires that the company regularly assesses the credit risk exposure of such accounts. This assessment uses the individual’s Discover account performance information, as well as information from credit bureaus. The company utilizes statistical evaluation models to support the measurement and management of credit risk. At the individual customer level, the company uses custom risk models together with more generally available industry models as an integral part of the credit decision-making process.
The company provides its customers with a variety of tools to proactively manage their accounts, including email, text message, push reminders and publicly accessible web pages dedicated to customer education. These tools are designed to limit a customer’s risk of becoming delinquent. When a customer’s account becomes delinquent or is at risk of becoming delinquent, the company employs a variety of strategies to assist customers in preventing delinquency or returning delinquent accounts to current status.
The company reevaluates its collection efforts and consider the implementation of other techniques as a customer becomes increasingly delinquent. The company limits its exposure to delinquencies through controls within its process for authorizing transactions and credit limits and criteria-based account suspension and revocation.
The company’s marketing group works closely with credit risk management to provide key functions to acquire new customers and enhance its relationships with existing customers. These key functions include product development, Cashback Bonus and other rewards programs management, protection product management, and brand and advertising management.
To attract and retain customers and merchants, the company continues to develop new programs, features and benefits and market them through various channels, including television, radio, mail and digital. Marketing efforts may promote various features, including but not limited to, no annual fee, Cashback Bonus and promotional offers, as well as various free benefits, such as Online Privacy Protection, FICO Credit Score, Freeze it, Spend Analyzer and Social Security Number Alerts.
Rewards / Cashback Bonus
The company’s cardmembers use several card products, all with no annual fee, that allow them to earn their rewards based on their purchases, which can be redeemed in any amount at any time.
Discover it card offers a 5% Cashback Bonus in categories that change each quarter, which customers must activate each quarter, up to a quarterly maximum and a 1% Cashback Bonus on all other purchases.
Discover it Chrome card offers a 2% Cashback Bonus at gas stations and restaurants on up to $1,000 in combined purchases each quarter and a 1% Cashback Bonus on all other purchases.
Discover it Miles card offers 1.5 miles for every dollar spent on purchases.
Discover it Business card, which the company no longer offer for new accounts, offers a 1.5% Cashback Bonus on all purchases.
Discover More card, which the company no longer offer for new accounts, offers a 5% Cashback Bonus in categories that change each quarter, which customers must activate each quarter, up to a quarterly maximum.
The company sells Identity Theft Protection and it services and maintains existing enrollments of the Payment and Wallet Protection products for its credit card customers.
Identity Theft Protection includes an initial credit report, credit bureau report monitoring at the three major credit bureaus, alerts to customers when key changes to their credit bureau files are made, monitoring that notifies a customer if their personal identifying information is illegally shared on the dark web, identity theft insurance of up to $1,000,000 to cover certain expenses due to identity theft and access to knowledgeable professionals who can help resolve issues.
Payment Protection allows customers to suspend their minimum payments due for up to two years, depending on the qualifying event and product level, when certain qualifying life events occur. While on this benefit, customers have no minimum monthly payment and are not charged interest, late fees or other product fees. This product covers various events, such as unemployment, disability, Federal or State disasters and other life events, such as marriage or the birth of a child. Depending on the product level and availability under state laws, outstanding balances up to $10,000 or $25,000, are cancelled in the event of death.
Wallet Protection offers convenience if a customer’s wallet is lost or stolen, including requesting cancellation and replacement of the customer’s credit and debit cards, monitoring the customer’s credit bureau reports at the three major credit bureaus for 180 days and alerting them to key changes to their credit files, and providing up to $100 to replace the customer’s wallet or purse.
Brand and Advertising Management
The company maintains a full-service marketing department charged with delivering integrated mass and direct communications to foster customer engagement with its products and services. The company also leverages strategic partnerships and sponsorship properties, such as the NHL and the Big Ten Conference to help drive loan growth. The company’s brand team utilizes consumer insights and market intelligence to define its mass communication strategy, create multi-channel advertising messages and develop marketing partnerships with sponsorship properties. This work is performed in-house as well as with a variety of external agencies and vendors.
The company’s credit card customers have the option to manage their accounts online via Discover.com, through Discover Mobile applications and by calling its U.S.-based customer service personnel. The company’s private student loan, personal loan, home loan and deposit product customers can utilize its online account services to manage their accounts and to use interactive tools and calculators.
The company’s processing services cover four functional areas: card personalization, print/mail, remittance processing and item processing. Card personalization is responsible for the mailing of credit and debit cards for new accounts, replacements and reissues. Print/mail specializes in statement and letter printing and mailing. Remittance processing handles account payments and physical check processing. Item processing handles hard-copy forms and electronic documents received through fax and mobile channels, including bank deposits, credit disputes and general correspondence, among other items.
The company monitors its customers’ accounts to help prevent, detect, investigate and resolve fraud. The company’s fraud prevention processes are designed to protect the security of cards, applications and accounts in a manner consistent with its customers’ needs to easily acquire and use its products. Prevention systems monitor the authorization of application information, verification of customer identity, sales, processing of convenience and balance transfer checks and electronic transactions.
Each credit and debit card transaction is subject to screening, authorization and approval through externally developed and proprietary POS decision systems. The company uses a variety of techniques that help identify and halt fraudulent transactions, including machine-learning models, rules-based decision-making logic, report analysis, data integrity checks and manual account reviews. The company manages accounts identified by the fraud detection system through technology that integrates fraud prevention and customer service. Strategies are subject to regular review and enhancement to enable the company to respond quickly to changing conditions, as well as to protect its customers and its business from emerging fraud activity.
Discover Global Network Operations
The company supports its merchants through a merchant acquiring model that includes direct relationships with large merchants in the U.S. and arrangements with merchant acquirers generally for small- and mid-size merchants. Additionally, Discover Network cards are widely accepted and acceptance continues to grow in a number of countries around the world on the Diners Club network, or through reciprocal acceptance arrangements made with international payment networks (i.e., Network Alliances).
The company maintains direct relationships with most of its large merchant accounts, which enables it to benefit from joint marketing programs and opportunities and to retain the entire discount revenue from the merchants. The terms of its direct merchant relationships are governed by merchant services agreements. These agreements are also accompanied by additional program documents that further define its network functionality and requirements, including operating regulations, technical specifications and dispute rules. To enable ongoing improvements in its network’s functionality and in accordance with industry convention, the company publishes updates to its program documents on a semi-annual basis.
Discover Global Network services the majority of its small- and mid-size merchant portfolios through third-party merchant acquirers to allow such acquirers to offer a comprehensive payments processing package to such merchants. Merchants also can apply to its merchant acquirer partners directly to accept Discover Global Network cards through the acquirers’ integrated payments solutions. Merchant acquirers provide merchants with consolidated servicing for Discover, Visa and MasterCard transactions, resulting in streamlined statements and customer service for merchants and reduced costs for the company. These acquirer partners also perform credit evaluations and screen applications against unacceptable business types and the Office of Foreign Asset Control Specifically Designated Nationals list.
The Discover Global Network operates systems and processes that seek to ensure data integrity, prevent fraud and ensure compliance with its operating regulations. The company’s systems evaluate incoming transaction activity to identify abnormalities that require investigation and fraud mitigation. Designated Discover Global Network personnel are responsible for validating compliance with its operating regulations and law, including enforcing its data security standards and prohibitions against illegal or otherwise unacceptable activities. Discover Global Network is a founding and current member of the Payment Card Industry Security Standards Council, LLC (the Council) and is working to expand the adoption of the Council’s security standards globally for merchants and service providers that store, transmit or process cardholder data.
The company provides technology systems processing through a combination of owned and hosted data centers and the use of third-party vendors. These data centers support its payment networks, provide customers with access to their accounts and manage transaction authorization and settlement, among other functions. The Discover Global Network works with a number of vendors to maintain its connectivity in support of POS authorizations. This connectivity also enables merchants to receive timely payment for their Discover Global Network card transactions.
The company’s approach to technology development and management involves both third-party and in-house resources. The company uses third-party vendors for technology services (e.g., cloud, telecommunications, hardware and operating systems), as well as for processing and other services for its digital banking and payment services businesses. The company uses its in-house resources to build, maintain and oversee some of its technology systems.
In its credit card business, the company experiences fluctuations in transaction volumes and the level of loan receivables as a result of higher seasonal consumer spending and payment patterns around the winter holidays, summer vacations and back-to-school periods. In its private student loan business, the company’s loan disbursements peak at the beginning of a school’s academic semester or quarter. Revenues in the company’s Diners Club business are generally higher in the first half of the year as a result of Diners Club’s tiered pricing system where licensees qualify for lower royalty rate tiers as cumulative volume grows during the course of the year (year ended December 31, 2022).
The company owns or has rights to use the trademarks, trade names and service marks that the company use in conjunction with the operation of its business, including but not limited to Discover, PULSE, Cashback Bonus, Discover Cashback Checking, Discover it, Freeze it, College Covered and Diners Club International.
The company is a bank holding company under the Bank Holding Company Act of 1956, as well as a financial holding company under the Gramm-Leach-Bliley Act and therefore is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the Federal Reserve).
As a large provider of consumer financial services, the company is subject to the supervision, examination and regulation of the Consumer Financial Protection Bureau.
The company’s bank subsidiary, Discover Bank, is chartered and regulated by the Office of the Delaware State Bank Commissioner and is also regulated by the FDIC, which insures its deposits up to applicable limits and serves as the bank’s primary federal banking regulator. Discover Bank is also a member of the Federal Home Loan Bank (FHLB) of Chicago.
In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the company is required to meet certain capital and management criteria to maintain its status as a financial holding company.
The relationship between the company and its United States customers is regulated extensively under federal and state consumer protection laws. Federal laws include the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, the Credit Card Accountability Responsibility and Disclosure Act, the Servicemembers Civil Relief Act, the Military Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act and the Dodd-Frank Act. These and other federal laws, among other things, prohibit unfair, deceptive and abusive trade practices, require disclosures of the cost of credit and other terms of credit and deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide privacy protections, require safe and sound banking operations, restrict the company’s ability to raise interest rates, protect customers serving in the military and their dependents and subject it to substantial regulatory oversight.
The company is subject to additional laws and regulations affecting mortgage lenders. Federal, state and in some instances, local laws apply to mortgage lending activities. These laws generally regulate the manner in which mortgage lending and lending-related activities are conducted, including advertising and other consumer disclosures, payments for services and recordkeeping requirements. These laws include the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, and various state laws.
The company maintains an enterprise-wide program designed to comply with all applicable anti-money laundering and anti-terrorism laws and regulations, including the Bank Secrecy Act and the USA PATRIOT Act of 2001.
The company has a program designed to comply with applicable economic and trade sanctions programs, including those administered and enforced by the United States Department of the Treasury’s Office of Foreign Assets Control.
The company competes for accounts and utilization with cards issued by other financial institutions (including American Express, Bank of America, JPMorgan Chase, Capital One and Citibank, N.A. (Citibank)) and, to a lesser extent, businesses that issue their own private label cards or otherwise extend credit to their customers.
The company’s private student loan product competes for customers with Sallie Mae and Citizens Bank, as well as other lenders that offer private student loans. Its personal loan product competes for customers primarily with financial institutions (including Citibank and American Express) and non-traditional lenders (including Lending Club and Upstart).
The Discover and Diners Club networks’ primary competitors are Visa, MasterCard and American Express. PULSE’s network competitors include Visa’s Interlink, MasterCard’s Maestro and First Data’s STAR. American Express is a competitor to Diners Club as both cards target international business travelers.
Discover Financial Services was incorporated in Delaware in 1960.