Discover’s Q3 earnings show growth in key segments, despite some declines

• Despite some declines, Discover’s Q3 earnings show growth in key segments, especially toward the tail end of the quarter.
• But Discover may need to rely on other means—such as rewards—to maximize sales volume.
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The card network reported 7% year-over-year (YoY) growth in total volume in Q3—an improvement from the 3% annual decline reported in Q2.

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Its Q3 volume growth was primarily driven by its network partners’ volume, which grew 34% annually, as well as its debit card network, Pulse, which saw 16% YoY growth. Despite overall volume growth, Discover’s credit card volume was flat in Q3—but it still points to improvement when compared with Q2, which saw a 15% plunge in credit card volume. Discover’s earnings also show that spending picked up at the tail end of Q3: Sales volume grew 4% YoY in September and 7% in the first half of October.  

Discover’s latest earnings point to it bouncing back from the negative impact caused by the coronavirus pandemic. 

• Volume is improving in key segments. Discover’s spending volume picked back up in Q3, with retail spending notably growing 18% YoY, which can perhaps be attributed to the easing of coronavirus restrictions, store reopenings, and a small boost in consumer confidence. Despite continued spending declines for the gas, restaurant, services, and travel sectors, these areas show significant improvement in comparison with Q2, which saw travel spending plunge 85% YoY, for example.

• Discover’s volume could tick up further as the holiday shopping season quickly approaches. September and the first half of October showed notable volume growth, which could mean that consumers are beginning to ramp up spending into the holiday season, especially since retailers like Amazon began holiday promotions early this year. This could be good for Discover, since more consumers might lean on cards during the busy shopping season, helping it boost its sales volume into Q4.

But Discover may need to rely on other means—such as rewards—to maximize sales volume. Rewards offerings could enable Discover to incentivize card spending, especially with two-thirds of US cardholders viewing rewards as valuable as cash.

As the shopping season approaches, continuing to pivot cash-back rewards away from categories like travel, and instead focusing on retail rewards—like Discover’s 5% cash-back rewards for online purchases at Amazon, Target, and Walmart during Q4—may be a useful tactic to encourage spending among cardholders.

Further, a potential second round of stimulus payments may help significantly boost spending among consumers and lead to increased volume for Discover. However, although negotiations for a second round of stimulus payments are underway, the prospect and timing of aid remains uncertain.

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