Q3 2021 Discover Financial Services Earnings Call
2% for the quarter.
Second is a continuation of very strong credit performance net charge offs were down $343 million from the prior year, which supported a $165 million reserve released this quarter.
Lastly, we continue investing for.
Our growth with increased marketing spend.
Operating expenses in other areas were largely related to the economic recovery.
Go over the details of our quarterly results and our full year outlook on the following slides.
Looking at loan growth on slide five.
We saw the return to growth this quarter with ending loans up 1% over the prior year and up 2% sequentially card loans were the primary driver and were also up 1% year over year and 2% over the prior quarter.
The year over year increase in card receivables was driven by strong sales volume and robust.
Our acquisition.
Sales growth continued to accelerate and was up 27% over the third quarter of 2019.
Year to date, new accounts were up 27% from their prior year and up 17% over 2019 levels.
The contribution from these factors was most.
Just actually offset by the ongoing high payment rates as household savings and cash flows remain elevated.
Payment rate was approximately 500 basis points over pre pandemic levels.
We anticipate that the payment rate will moderate a bit as most federal COVID-19 support programs have ended and consumer savings.
Most have started to decrease.
That said, we expect payment rates to remain above historical levels through 2022.
Looking at our other lending products.
Organic student loans increased 4% from the prior year with originations up 7% as most schools have returned to the normal.
Normal in person learning model.
Personal loans decreased 4% driven by high payment rates, our underwriting criteria have returned to pre pandemic levels and we expect a return to growth in this product in future periods.
Moving to slide six.
Net interest margin.
<unk> was 10, 8% up 61 basis points from the prior year and 12 basis points from the prior quarter.
Compared to the prior quarter the increase in net interest margin was primarily driven by lower interest charge offs and lower funding costs.
This was partially offset by a higher mix of promotion.
While rate balances.
Card loan yield was up one basis point sequentially as lower interest charge offs were offset by the increased promotional balance mix.
Yield on personal loans declined 15 basis points sequentially due to lower pricing.
The margin continue.
<unk> to benefit from lower funding costs, primarily driven by maturities of higher rate Cds, and an increased mix of lower rates savings and money market balances.
Average consumer deposits were flat year over year and declined 1% from the prior quarter the quarter over quarter decline was largely driven by consumer Cds.
We also saw a slight decline in savings and money market deposits as consumers continue to spend excess levels of liquidity.
We also continue to optimize our funding stack late in September we executed our first ABS issuance since October 2019, consisting of a one.
$2 billion security with a three year fixed rate coupon up 58 basis points and a five year $600 million security with a fixed coupon of 103 basis points.
These were our lowest avs coupons ever and show good execution and timing by our Treasury team.
Looking at revenue on slide seven.
Total noninterest income increased $90 million or 20% over the prior year, excluding the unrealized loss on equity investments.
Net discount and interchange revenue was up $61 million or 26% driven by strong sales volume.
This was partially offset by increased rewards costs due to high sales in the 5% category, which was restaurants and Paypal both this year and last.
We continue to benefit from strong sales through our partnership with Paypal.
Restaurant sales were up 62% year over year as dining activity recovered.
Loan fee income was up $21 million or 21%, primarily driven by lower <unk>.
Late fee charge offs and higher non sufficient funds and cash advance fees.
Looking at slide eight.
Total operating expenses were up 180.
Billion or 18% from the prior year.
The details reflect our focus on investing for future growth, while managing our operating costs.
Employee compensation increased $12 million driven by a higher bonus accrual in the current year, excluding bonuses employee compensation was down three.
85 from the prior year from lower head count.
Marketing expense increased $70 million supporting another quarter of strong new account growth.
Other expense included a $50 million legal accrual.
Professional fees were up $47 million primarily due.
Due to higher recovery fees courts, reopening combined with strong credit and economic conditions have driven an increase in recoveries and their associated fees.
Year to date recoveries were up 20% compared to the prior year.
The benefits of these cost is reflected in lower credit losses.
Percent.
Moving to slide nine.
The trend of sustained strong credit performance continued.
Total net charge offs were a record low at 146% down 154 basis points year over year, and 66 basis points sequentially.
Net charge off dollars decreased $343 million from the prior year and were down $131 million quarter over quarter.
Credit performance was strong across all products as evidenced by the net charge off rates on card private student loans and personal loans.
Well.
Total allowance for credit losses on slide 10.
This quarter, we released $165 million from the research and our reserve rate dropped 35 basis points to seven 7% the.
The reserve release reflects continued strong credit performance and a largely stable macroeconomic.
<unk> outlook.
The impact that these was partially offset by a 2% increase in loans from the prior quarter.
Our economic assumptions include an unemployment rate of approximately five 5% by year end and GDP growth of just over 6%.
These assumptions were slightly less.
Moving to no issues in the second quarter, but still reflects a strong economic outlook.
Looking at slide 11.
Our common equity tier one for the period was 15, 5% well above our 10, 5% target.
We repay.
$815 million of common stock and as we had previously announced increased our dividend payable by 14% to <unk> 50 per share.
These actions reflect our commitment to returning capital to our shareholders.
On funding, we continue to make progress towards our goals of <unk>.
Repurchases be 70% to 80% of our funding mix.
<unk> now make up 68% of total funding up from 62 in the prior year.
Wrapping up on slide 12.
Our outlook for 2021 has not change and reflects continued strong.
Execution against our financial and strategic objectives.
In summary.
We remain well positioned for profitable growth from improving loan trends.
Credit performance trends remained favorable reflecting positive macroeconomic conditions and our approach to underwriting and credit management.
<unk> investments for growth have supported a significant increase in new accounts, while we've contained operating expenses last.
Lastly, our.
Our integrated digital banking and payments model is highly capital generative, allowing us to invest for growth and return capital to shareholders.
We look forward to providing.
Outlook for 2022 on our conference call in January.
With that I'll turn the call back to our operator Ashley to open the line for Q&A.
And at this time, if you would like to ask a question. Please press star one on your Touchtone phone.
You remove yourself from the queue.
<unk> you may do so by pressing the pound key we do remind you that you. Please pickup your handset for optimal sound quality.
We'll take our first question from John <unk> with Evercore ISI. Please go ahead.
Good morning.
I wanted to see if you can give us a little more color on your payment rate expectations I know you expect from them.
Elevated through 2022, but just wanted to see if youre starting to see signs of accounts are typically revolve.
We're going to see some declines the payment rates, there and then I guess.
How material.
The inflection you think we can see through 2022 or do you think that's not likely until 'twenty three.
Great.
Alright. Thanks.
Thanks for the question. So you know that the payment rate has been persistently high.
And what we did see it in the month of September was that ticked down mildly.
It did it did increase from July to August which was.
Frankly.
Bit of a surprise, but as I look as I look at the data we're seeing here in terms of revolve.
And the forecast trends my expectation is that in the fourth quarter. It will continue to step down some of that has to do with governments more support.
Great programs ending in September and some of it has to do with the holiday season.
And then as we look on the holiday season ended 2022, I do expect that it will continue to.
Step towards a normalized rate but.
I don't think that'll happen.
Support till 2023 so.
How do we how do we think about the implications from that.
Certainly the payment rate is a bit of a headwind to growth, but what we've seen is really strong account acquisition and strong sales growth, which.
And to date has helped to offset some of that payment rate impact. So so overall.
We feel very very comfortable that <unk> the balance of 'twenty, one and then 'twenty two we will have a bit of tailwind related to both payment rates declining and then strong.
Strong execution from the new accounts and sales growth.
Got it okay. Thanks, Sean and then.
On the account acquisition front.
I know you indicated that you expect marketing cost to be higher in the second half.
So if you can give us a little bit more.
More detail.
Strong and your expectation there and how they could trend.
For the fourth quarter, and then does that imply that you could see some continued upside pressure into 2022 on marketing as you drive account acquisition in light of pressured payment rates.
Yeah.
Yes, so from a marketing standpoint.
We spend we spend the money as we see opportunity to drive profitable.
New accounts and.
Frankly, we've had a great quarter and a great year with that.
The third quarter spend actually came in mildly lower than what we originally anticipated.
<unk>.
Point the guidance I had provided on the last call was that we would approximate the 2019 levels of total marketing expense I think it'll be a little bit.
Under that bid under that largely.
Not because of opportunities, but basically kind of some some process oriented stuff.
The terms of.
Of account targeting so so we feel we feel like the money, we'll spend in the fourth quarter.
Certainly generate positive new account growth will it it will pick up from the third quarter, certainly and provide us a good trajectory.
<unk> 2022.
Great. Thanks for taking my questions.
Thank you.
Okay.
And we will take our next question from Ryan Nash with Goldman Sachs. Please go ahead. Your line is open.
Hey, good morning, everyone.
Good morning.
Roger.
Jerry you talked about intense competition.
The impact of new entrants can you maybe just expand on those points about.
What youre seeing competitively how you think discover is positioned for it and where do you believe this is having the biggest impact on your business and how are you responding for it. Thanks.
Sure. Thanks for the question.
Refresh my actual comment was good growth in the face of intense competition and I think that really sums it up well.
The competition in the card business is always intense.
We were lucky enough to have a lapse in 2020, and so some shaw extraordinarily good.
Cost per account.
But.
It's what we're used to pacing it will vary based on which issuers are refreshing their cards are or have more of a desire the growth for growth than others, but I think our focus on a clear differentiated value proposition has resulted in continued.
<unk> strong generation of new accounts.
I'm excited about what I see in terms of the new entrants, we see that less in the core credit card space, but I would say very very aggressive competition around personal loans.
That's an area, where we focused on the long term.
<unk> remained disciplined in our underwriting and what we're willing to invest in new accounts.
Are used to seeing competitors come and go.
Got it and if I could ask a follow up question to ask a question John asked prior so John in terms of marketing.
What will you be hitting in the fourth quarter as it steps up a little bit is should we think about that as a go forward run rate or are there more investments that needed to be made.
And then second there was comments about <unk>.
BT is increasing and as it relates to marketing can you maybe just help us understand where are we today versus.
Pre pandemic levels and what is the strategy to continue to increase balance transfer activity on a go forward basis. Thank you.
Sure.
On the marketing.
Spent.
That will be determinant.
Determined based on the opportunities we see.
As we look.
At.
'twenty two we do see.
Benign credit environment and.
Frankly, a very strong opportunity to drive profitable new account growth.
<unk>.
As that opportunity continues to persist persist, we'll continue to spend marketing dollars.
So.
What I would what I would suggest is as we concentrate here on <unk>.
2021, and then in the January call, we'll talk about.
<unk> 22 in terms of the opportunities there, but I'll leave it leave you at this point.
The fourth quarter.
<unk> trajectory should.
Should should help inform what we intended to spend in 2022 in terms of.
Yes.
Balance transfers.
We did we did see.
Yes.
Impact from some of the some of the.
Increased balance transfers that we executed.
In early part of 'twenty, one and the third quarter in terms of a mild impacts to margin.
We.
We will continue to take a look at that space and see.
See what we can what we can generate profitably.
It's been it's been a good source of account acquisition for us historically and will.
We will continue to remain disciplined in.
Put.
Yes.
<unk>.
Prime revolver accounts on down.
Balance transfer.
Thanks for taking my questions.
You're right.
And we'll take our next question from John Cindy. Please go ahead.
Please go ahead.
Hey, good morning, I guess, Roger a little bit of a longer term question around your debit business.
It seems like we're going to have more direct.
Correct the bank payments in the United States overtime.
And there's a lot going on Paypal potentially buying pinterest.
Can you talk about how you see debit evolving.
The long term and are there any implications given that you own a network.
Sure Great question there.
Or who is I would say new new payment schemes and methods out there a lot of them, though tend to rely on existing payment. So you think about when.
When Apple launched their wallet.
Even paypal.
The vast majority of their volume is processed through existing payment networks and debit processing is incredibly complex and quite frankly, very low margin and very efficient as you look at how sort of the three major debit networks us Mastercard and visa.
Operator.
And right now given the interchange caps at a lot of banks have.
The economics for them are relatively thin so while we look at what the fed might be proposing what goes on in other markets.
Don't see anything in the near or even medium.
Term it looks like it has the potential and quite frankly, you are starting to see an increase in volume on the debit side, even a lot of the buy now pay later players are leveraging debit for their payments.
You don't see debit really.
<unk>.
Going away.
And being replaced by direct to account payments in the U S.
No.
The risk management of paint.
Payments is quite complex in terms of both fraud and identity.
There are a lot of processes and controls the major.
Networks have in place there is a robust ecosystem. If you think about point of sale devices merchant acquirers and so to think that that will change suddenly.
ICEE has a low probability.
Thank you.
And we'll take our next question.
<unk> from Betsy <unk> with Morgan Stanley. Please go ahead.
Hi.
Hey, Roger just following up on that is there an opportunity for you to take your debit network and debit capabilities and expand it.
Into that New island called me I.
You know in into that and revitalized interest in debit that we're seeing.
Yes, Great question, Betsy certainly we have a unique set of network assets and can provide connectivity to merchants whether through proxy card numbers are a series of other technologies.
<unk>.
And worked closely with a number of fintech around that so that's at the core of some of what we do with with Sizzle.
Actually that was the beginning of our relationship with Marquette out many many years ago and they are a lot of others that are either in the market now or that we're in discussions with.
So I think the pulse of the debit assets, we have combined with our signature network.
An advantage and one that we look to monetize.
Okay, and then as we're thinking about.
Dance, that's coming over the next couple of years between loan growth and credit normalization.
Can you help us understand how you're thinking about managing that trajectory.
Because what I heard earlier in the call is you've been getting more and more efficient at account acquisition right part of your marketing spend coming in lower than expected or at least lower than consensus and we expected.
Is a function of you do.
Something I don't know if it's if it's cloud or technology or what to get more efficient at account targeting.
Account acquisition, so on the one hand, <unk> got that running in a very positive direction, you talked about the payment rates being a little.
A bit of a headwind to monetizing that but at the same time, we've got credit normalizing so.
Is there an opportunity for you to pull levers on marketing to generate some more loan growth or is it.
More likely to come from the personal loan side of the student loan side as credits normalizing how should we think about how ya.
We're managing that.
Yes Betsy.
I'll take this one.
So.
There's a lot to that question.
Let me just give a view in terms of what.
What we're seeing is as we closed out the third quarter. So.
As I mentioned the <unk>.
<unk> is stepping down.
From August to September we expect that to continue that will help.
Certainly.
Loan growth.
My sense is today.
There is a relationship between <unk> and <unk>.
Payment rate.
Sales activity. So the persistently high payment rate I think has driven sales activity.
Ross the industry now.
We benefited.
I would say slightly disproportionately in terms of driving incremental sales partly due to that.
Acquisition point, you mentioned so.
So there's two dynamics the third dynamic is credit normalizing.
And my sense is that credit normalization.
We'll continue through 'twenty two into 'twenty three so so.
Today, where I said.
Im.
Positive on credit so.
So.
Those factors in the aggregate. In addition to the point you mentioned in terms of account targeting I think position us pretty well in 'twenty two for <unk>.
Positive loan growth not the specifics will come.
But later in January when we give our view but.
We're all we're all positive on that front today.
Okay and could you touch on what's driving that account acquisition being more efficient you mentioned the process oriented improvements.
Specifically.
Typically talking about there.
So Betsy it's Roger again, a lot of the enhancements that we're seeing are leveraging advanced analytics and so that's really helping both on the underwriting side with sort of a swap in and swap outs as well as better targeting combined with investments, we're making from from beginning to end.
Im a little in the Martech stack and we think those are already serving as well, but there's also plenty of upside as we continue to focus on that area.
Got it alright, thank you.
Okay.
Yeah.
We will take our next question from Bill <unk> with Wolfe Research.
Go ahead.
Good morning, Roger and John.
I wanted to.
Just a follow up on your conviction and more robust loan growth in 2022, if we were to get even just modest mid single digit spending growth next year do you think the incremental tailwind from payment rate normalization.
<unk> could be enough to support double digit loan growth and just to clarify on this point did you did you say earlier John that you think we could see payment rates get back to sort of normalize maybe 2019 levels by the end of 2023 is that a reasonable expectation.
So.
Great.
23 is the horizon that we're looking at prepayment rate to normalize at.
When that happens, we expect savings rate too.
Return to normalized levels. So one one view is continue to watch that.
Savings rate.
And that should help inform payment rate.
Frankly, one of the metrics, we look at in terms of.
Robust loan growth in 2022.
Let me let me just.
But at this way here because.
Because we're going to hold off until January.
Providing.
Splits the detail, but the new account originations has been been important for growth sales activity has been important for growth.
Payment rate as I mentioned in the prepared remarks has been.
Headwind.
Not completely unanticipated we did we did see it Mario.
<unk> higher than what we had modeled but we're still on track for delivering that.
The loan growth that we talked about or 'twenty, one 'twenty two it will be.
Informed by all of those factors and shared bill with more in more detail.
In January.
Yeah.
Thanks, if I can follow up on a separate question on <unk>.
The NPL risk.
Yes, Theres a group on one side I think that it's largely customers who can't qualify for credit and are just using NPL to turn their debit cards into credit cards, we've heard.
Subtle which we.
I was one of your partners sort of speak to that point and then there's this other group that is more concerned about the competitive threat posed by certain B M. P. O players that do longer term installment lending and the risk that they will eat into margins and pricing over time can.
Can you frame for us how youre thinking about the competitive threat and and.
Now that you've had a little bit more time to study.
What's happening with the different BNP L players.
Sure. So I'll start with the M&A, while we've had more time to study it I would say the market is not yet mature and I think Martin clearing economics have yet to be established.
What are the challenges.
There are many segments within buy now pay later from the people financing a multi thousand dollar purchase which by the way they've done for years in terms of traditional sales finance versus sort of more spreading out payments on $60 worth of cosmetic so those.
Segments, all have different characteristics certainly at the lower end there are many customers who are either debit, preferring or do not have access to significant amounts of credit, but I think you'll continue to see it evolve you're starting to see some some pressure from merchants who are unwilling to pay.
<unk> take rates above what they pay and card. So right now we certainly see opportunity on the payment side as I talked about earlier leveraging our assets over time, we think there may be opportunity for us as an issuer and again, partially leveraging our unique model and our proprietary network.
Right.
I would say, we're not seeing any noticeable impact on revolving loans and believe that we are well positioned to respond if it does emerge.
Thanks, Roger and John I appreciate you taking my questions.
Thanks Bill.
We will take our next question from Jason.
Nick Ronny with GW. Please go ahead.
Thanks, Good morning.
And to follow up on Ryans questions on competition I guess, Roger when you think about.
The competitive landscape on a go forward basis, if you looked at the post financial crisis period, a lot of that.
Petition was transact or oriented like people going to transact or customers.
Do you think this time, it's going to be able to different given what unfolded last time or do you think of that.
And maybe Sam I'm, just curious as you think about how you are setting up competitively.
So Sanjay I am lucky enough to.
Comp to look back over multiple cycles of competition and it has varied everything from sort of an intense focus across the board on prime revolvers to trans actors.
I think certainly American express will stay focused on that spend based model.
A lot of banks focus.
To be able to transact <unk>, because they are very profitable customers not so much in card, but in other segments of the business.
The prime revolver space has historically been the most challenging in terms of what it requires from a value proposition and underwriting for transact.
On those it's really about rolling out a rich rewards program.
We expect to see competition across the spectrum, but what.
Impacts us most will be that in the prime revolver space.
And you don't see any of that.
Really intensifying relative to what.
What do you anticipate it it's pretty consistent.
Yes, I would say, it's intensified significantly since sort of the lull during the pandemic, but is now getting back to I would say more more normalized levels got.
Got it and then John just one follow up on NIM I know.
We're not talking about next year's guidance until next quarter, but just broadly speaking as we sit here today with your NIM.
Pretty high levels relative to history.
The growth.
Do you envision that to be a tailwind for the NIM or does that start counteracting some of this because.
The BT.
Rates increase I'm, just curious sort of how we should think about the progression going forward. Thanks.
If you go back and look at NIM, historically youll see that.
Was subjected to.
Thankfully higher.
Your funding costs.
Unsecured term term debt.
What we've tried to do is sure up the liability side of the balance sheets of targeting 70% to 80%.
Don.
From deposits and then the rest is a combination of secured and.
On secured.
Security offerings.
That will create stability.
In terms of the funding cost in terms of pluses and minuses too.
To the.
So the revenue line.
What we'll say is.
<unk>.
Some <unk> related.
Impact to NIM Youll see credit if it does normalize a bit of a credit normalization.
Terms of.
NIM, but you'll also see that sustained impact from funding I just talked about so.
We're looking at NIM too.
B.
Higher than what we've experienced historically.
And we're going to we're going to compare.
'twenty one how we ended the year in terms of the balance sheet position.
<unk> and <unk>.
See how that that impacts 'twenty, two but overall.
I would say the funding position has created more stability and a.
A economic benefit to investors.
Understood. Thank you.
And we will take our next question from Mihir Bhatia with Bank of America. Please go ahead.
Good morning, Ken. Thank you for taking my questions maybe to start.
If he could just clarify a little bit on the marketing expense guidance I guess, maybe for the fourth quarter I understand you don't want to talk about 2000.
Still yet, but just for the fourth quarter. When you talk about marketing expense relative to 2019 levels are you talking on a quarterly basis. So fourth quarters. We're looking at 235 ish million I understand you may not want to give exact numbers, but.
Should we be thinking on a quarterly basis on a full year basis, because you know just given the backup in.
The first three quarters of the year that would be a pretty big increase.
On a quarterly basis, so just want to make sure I clarified that.
Thanks.
When we reference 2019, we were talking a full year basis. So then that would force us to do a little bit of math on the.
'twenty quarter in fourth quarter, we came in lower in the third quarter than we anticipated fourth quarter, we expect it will increase from.
The 210.
<unk> to frankly remove some ambiguity on this so it'll be.
Somewhere in the range of.
220 to call it $2 80.
Okay.
And then.
Date to give that level of specificity, but given the confusion I just wanted to.
Kind of put it away.
Sure.
And we appreciate.
<unk>.
Maybe just taking a step back on the credit side.
And just longer term consumer credits assortment, how do you underwrite new accounts can you just talk about what kind of through the cycle loss rate assumption Dealmaking, I guess, what I'm really trying to understand is what is the normalized loss rate for your credit card portfolio.
About non with them.
Economics.
Yeah.
So.
I would confirm we do use a through the site and through the cycle loss rate and so do not use current losses, but thats not something we disclose.
Okay. Thank you.
As we think.
And well take our next question from Citi.
Citi. Please go ahead.
Thanks.
<unk> of spending by your cardholders accelerated a little bit in <unk>.
<unk> 2019.
Thanks for that.
Consistent through the quarter or did it show any signs of.
In a rising or falling.
In terms of the cadence there.
We have seen.
Our ups and downs.
In particular, we talked about a bit of a softening around travel.
That occurred in August and I think that was driven by a lot of what was going on with the pandemic, but we continue to see very robust sales volume.
Even continuing into October.
Okay. Thanks.
And then.
Comments on the personal loan pricing and competitive pressures there is that.
Mainly from new entrants in the market, where we're seeing a lot of different types of.
Personal loan models coming to market in the past couple of years is that something that you would expect to continue.
As competitive pressure going forward or is this more of a just.
Just marking down relative to where the existing book.
A lot of it is coming into from new entrants personal loans are probably the easiest to fund outside of the bank.
And have the easiest.
Servicing requirements and so that's where a lot of new entrants will go with new models.
We are disciplined both on credit as well as pricing and will not go below the targeted returns we want to hit.
A lot of times that will.
We will flush its way through when they either don't get.
Sure formats that they want to see or have other challenges.
You do get sometimes Google who are prioritizing growth over returns, but that tends not to last for too long.
Thank you.
And well take a question from Mark Delaney with.
Get the Barclays. Please go ahead.
Yes. Thanks.
I had a question about what youre seeing on the student lending space on one of your competitors has noted some headwinds in the quarter.
How's that shaping up.
So we feel pretty good about peak season volume.
Pumps were up roughly 7% year over year.
And we believe that.
We gained share although we're still sort of processing so.
Clearly.
We saw one major competitor step back last year, but we're very excited about.
Volume market, we underwrite it in a very disciplined way and it's a great way to get a really good product and our brand in front of the.
The next generation of.
Prime card holders.
Okay got it and then just a follow up question on on pulse I mean as you know.
There's some pretty strong volumes there.
Roger is there a point at which you start to get some meaningful scale benefits and the earnings contribution from that becomes more meaningful and grows faster than the volumes.
We would love to increase the percent of our earnings that comes out of the payments segment.
Yes, I think one of the challenges. We also are working pretty hard to increased earnings from our banking segment. So we're not standing still there either.
It's while we're excited about pulse. It's also very competitive we're battling for routing it for routing at the merchant level.
With visa Mastercard day in day out we've seen a lot of growth.
Hi from expanding.
From traditional pin debit to card not present and.
And so that's been particularly helpful. But yes, we're very focused on growing that business.
Okay got it thank you.
And we'll take our next question from.
Moshe Orenbuch with credit Suisse. Please go ahead.
Great. Thanks.
Maybe just to come back to the new account acquisition is there, particularly in card is there a way to talk about either.
There are any different channels that you are using or what's the nature of the consumer or is there any any differences.
And the type of consumer that you are seeing.
Not really Marcia I don't think we've seen anything dramatic since prior to the pandemic.
Clearly the continued migration to digital channels.
Direct mail becomes a smaller and smaller piece, but.
That's been a trend for many years now.
So we continually are fine tuning the digital channels I guess, what we've seen is a greater ability to measure the results of top of funnel spend as it shifts more digital when that spend moves from from TV to even.
<unk> video Thats online you can do a better job with tracking and attribution.
And so we are repositioning how we spend and thats one of the areas, we're leveraging some of our advanced analytics.
Gotcha. Thank you.
And as you.
Mentioned kind of using balanced.
<unk> transfer as part of this can you talk a little bit about anything you can share with us in terms of whether theyre all at zero or are there some that are at.
It yields above zero and.
Any kind of update on what you've seen in terms of retention of those balances.
Sure.
One of the bigger trends.
There was a real collapse and balance transfer demand during the pandemic clearly a lot of issuers were pulling back on credit line increases, but I think consumers were much more focused on paying down their debt versus moving it around so you saw a softening in demand for personal loans and balance transfers.
That starting.
To come back for US a lot of our acquisition offers orange zero percent.
Our portfolio offers tend to either be above zero or have a fee that provides a pretty effective yield and as John pointed out for most of those.
We see a very high return from the balance transfer itself given this funding environment as well as a good percent.
Sticking and that's something we model very carefully.
Great. Thanks very much.
Yes.
Yes.
And we'll take our next question.
Dominick Gabriele with Oppenheimer. Please go ahead.
Great. Thank you so much for taking my questions I guess, if we just think about the.
The comments around the.
Economic outlook getting for our the assumptions around your economic outlook, becoming a slightly worse from the third quarter.
<unk> from from the second quarter to the third quarter, but then being incrementally positive into 'twenty two credit trends can you just square those two pieces together.
Yes happy to.
Dominic so when we modeled in the second quarter.
Frankly.
The the economy.
<unk> saw a higher level of GDP growth.
And.
Employment returning to normalized levels sooner.
And.
When we updated those GDP it come down employment returning to normalized levels.
Pushed.
So that was one of multiple inputs, we provide that detail because frankly.
Frankly, the most.
Most transparent that people can take a look at to get a view of how we're thinking about the reserves now.
The other items.
<unk> are important in terms of our thinking here in the third quarter.
First the portfolio performance and it's been Super strong.
<unk> was the ending of many of the government support programs related to Covid. So most of those ended in August and September.
Well, we'd like to do is see some seasoning of the impacts of those into into the fourth quarter and perhaps even in the first quarter next year.
<unk>.
It's what we expect is that the impact of that seasoning will be very very mild on the portfolio.
And the Mac at the broad macros continue.
To look favorable.
There is.
Yes.
There is enough.
<unk> referenced that would lead us to.
Begin to step the reserves back to day, one, but a lot of things need to happen and.
We ended.
Ended up where we were in the third quarter.
We went through multiple models multiple scenarios and we got comfortable with.
We work to make sure the balance sheet was fairly stated, but we do we do see that the broad macros out into the future.
Our positive so we.
We'll see how they sustain and make a call in the fourth quarter in 2022.
Great Thanks for that and.
If you all think about how the hierarchy of products that you have as well as across the consumer space for normalization on which products could normalize perhaps let's just I.
I don't know.
I don't see even maybe 2019 levels NCO rates.
Are there certain products, you would expect to normalize either faster than other products or.
Any any color you can provide along the trajectory of one product versus the other given what youre seeing in.
Customer base that would be awesome. Thank you so much.
That's a difficult thing to do in that.
It will be subject to the economic environment. So so we know historically right if.
If there is a period of.
The tougher financial situation of personal loans will be the ones that.
Get get the lease priority in terms of payment credit cards tend to be high the student loans.
The long duration of those.
Of those contracts.
You don't seem to gyrate as much.
In Europe.
Economic output plus.
So much of our portfolio is cosigned debt.
It provides additional coverage there.
So.
You get to kind of personal loans subject to the economic environment and then the card.
My sense is the card has been prioritized.
<unk>.
In terms of the payment hierarchy because of what.
What has happened in terms of cash in the digital environment, it's really difficult to to shop without a card. These days so.
So I look I look for stability there.
Yeah.
Great. Thanks, so much I.
<unk>.
Yeah.
And our final question will come from Bill Ryan with Seaport Research. Please go ahead.
Thank you and good morning, a couple of questions.
One on the personal loans business.
I believe you've been in the business since 2007, a lot of new entrants in the marketplace today.
I appreciate you kind of talked about it.
But I would say remember.
Two thirds of your book is roughly from the existing discover credit card file but.
But the other third historically coming from the other players out of market or out of your existing file.
As far as the underwriting youre seeing from the new entrants.
You've kind of talked a.
A little bit about it but I was wondering if you could take a little bit more granular approach to it and talk about are they making compromises relative to what you are willing to do on credit payment income yield verification all of the above.
And second just kind of going back to the bonus accruals.
A lot of companies are stepping up.
This is <unk>.
Employee retention efforts is this something we should kind of view as transitory onetime or might this transfer into a little bit higher compensation expense going into next year. Thanks.
Yes.
I'll start with the bonus accrual we haven't made any changes to our bonus program.
So to the extent there are changes in bonus accrual.
Reflects for stronger financial performance this year versus last year, and then how that translates.
In terms of the personal loan space. It is very hard to get.
Line of sight into the practices.
These companies and there are many of them, we've seen them come and go over multiple cycles.
In general I would say they tend to have fewer manual or labor intensive processes. So I'd be surprised if they did the extended employment verification.
Vacation, we do and again it might be appropriate if their average ticket is lower.
<unk>.
They may have different return profiles. The one thing I would say the vast majority lend to a much broader spectrum than we do and so we focus on the prime segment again, primarily that.
Consolidation, but it is it is hard to generalize across the many different new entrants that may have different models.
Okay. Thank you.
Excellent well. Thank you all for joining us and if you have any further questions. Please reach out to the IR team will be around all day.
To address them, thanks, again and have a great day.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect at any time.
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