Even as payments executives stress that consumers continue to appear healthy, card companies are preparing for economic changes. American Express said last week it bolstered its provision for credit losses in the third quarter. 

With inflation and rising interest rates challenging consumers, credit metrics such as delinquencies and charge-offs are beginning to tick up from COVID-19 pandemic-era lows. Discover reported its third-quarter delinquency rate for credit card loans was 2.1%, and credit card net charge-off rate was 1.9%. Those levels are higher than August figures, when Discover’s delinquency rate was 1.96% and the charge-off rate was 1.86%.

Hochschild said the company has experienced continued strength in sales in October, although categories such as consumer goods are “softening” compared to last year and travel has slowed after the summer’s strong growth. 

Despite higher prices causing Discover’s customer base “some pain,” customers typically have the liquidity to absorb inflation, Hochschild said during Tuesday’s call. 

Regarding underwriting for new accounts, Discover tightened its credit standards for those customer segments “that will be most volatile in a downturn, so think the lower end of prime,” Hochschild told analysts. Although it’s not a time to be widening credit, Discover is benefiting from analytics investments that enable it to fine-tune underwriting and customer targeting, he said.

Third-quarter operating expenses climbed 17% to $1.4 billion over the year-ago period, largely due to employee compensation and marketing.

In light of customer growth, Discover is hiring about 2,000 servicing agents through the remainder of this year and into next, said Chief Financial Officer John Greene. Additionally, after experiencing higher employee turnover last year, the company is back-filling salaried positions, he said.

Customer credit losses are beginning to increase, but Greene said he thinks “credit cards have increased in the payment priority because folks can’t access the digital economy without a credit card,” Greene said. 

That prioritization of the primary credit card among a consumer’s debt obligations could “impact relative charge-off rates versus the historical trends,” Greene speculated.

The internal investigation into Discover’s student loan practices continues, the company said in the SEC filing. During the company’s second-quarter earnings call, Hochschild and Greene were peppered with analyst questions regarding that loan probe and the related pausing of the company’s share repurchase program. 

At that time, Hochschild said the investigation was taken into account when Greene reaffirmed expense guidance for the remainder of the year. Greene reiterated that Tuesday as he fielded a few analyst questions on the resumption of share buybacks. He said the company is hopeful that will occur in the fourth quarter.

By Caitlin Mullen on Oct 26, 2022
Original link