--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.
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 firstname.lastname@example.org
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