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Discover Financial (NYSE: DFS) and American Express (NYSE: AXP) are leading credit card companies which operate a closed-loop payment processing network (i.e. they issue cards, and also process payments on their network). Discover Financial offers credit cards, personal and student loans, and deposit products to its clients. Further, it operates the Discover Network (a credit card payments network), the PULSE Network (“PULSE”) - its ATM, debit and electronic funds transfer network, and Diners Club International (its global payments network). The revenue share of its card business has significantly increased over the last decade – from around 43% in 2008 to over 78% in 2018.American Express’ principal products and services include charge and credit card products along with travel-related services to consumers and businesses across the globe. It has a sizable credit card business with an average revenue share of 84% over the last decade.In this dashboard, Trefis compares key operating metrics for the credit card business of Discover Financial and American Express over the last few years.
How do consumer card revenues for Discover Financial and American Express compare for the most recent year?As of 2018, Discover Financial's consumer card revenues stood at $8.4 billion - 61% less than that of American Express's consumer card revenues of $21.5 billion.
Consumer Credit Card Revenues - DFS
Consumer Credit Card Revenues - AXP
Note: American Express offers both consumer and commercial credit card products, whereas Discover Financial offers only consumer credit card products. Hence, we have considered only consumer credit card business of American Express for this analysis.
American Express' consumer card transaction volume was 3.5x of Discover Financial's figure in 2018
Discover consumer card transaction volume
Amex consumer card transaction volume
Card transaction volume is the dollar value of total purchases made on credit cards.American Express's consumer card transaction volume was almost 3.6x of its peer over each of the last 3 years.Discover Financial reported a 21% increase in consumer card transaction volume over 2015-2018, from $118.4 billion in 2015 to $143.9 billion in 2018. On the other hand, American Express’ figure was reduced by 26% over the same period.This could be attributed to a 35% y-o-y decline in the figure in 2016 due to a 40% drop in consumer credit card transaction volume in the U.S mainly driven by lower Costco related volumes.Thereafter, American Express’ figure has grown 13% from $451.2 billion in 2016 to $511.4 billion in 2018 and is expected to cross $598.3 billion by 2020 – which would be 3.67x of expected Discover Financial’s figure of $163.2 billion.
Similarly, American Express generates significantly higher card fees on every dollar in card volume
Fees as % of Consumer Card Transaction Volume - DFS
Fees as % of Consumer Card Transaction Volume - AXP
While Fees as a % of consumer card transaction volume has decreased for Discover Financial, American Express’s figure has shown positive movement over the recent years.Discover Financial’s fees as a % of consumer card transaction volume were 0.65% in 2018, which was less than one-fourth of American Express’s figure of 2.87%.As a result of this stark difference in fees percent, the latter has generated significantly higher fees income than Discover Financial over each of the last four years.The main reason for this difference in fees % is higher discount fees generated by American Express, which constitutes a major chunk of fees revenue for both the card issuers. American Express’ focus on affluent customers and its sizable portfolio of charge cards (which do not generate any interest revenues) are responsible for higher network volumes for the company. Further, it also charges much higher discount fees from merchants compared to any of its competitors (Discover, Visa as well as Mastercard). This coupled with higher network volumes translates into elevated discount fees for Amex.Moving forward, we expect the fees as a % of consumer card transaction volume to reduce to 0.62% for Discover Financial in the near term, whereas American Express’s figure would remain around the current level of 2.87%.
CONCLUSION: Although American Express' consumer credit card business is larger, Discover Financial has more profitable operations.
Although American Express has a larger consumer credit card business both in terms of card transaction volume and fees per dollar of transaction volume, it is less profitable than Discover Financial.Further, Discover Financial has delivered a better return on credit card loans and has higher outstanding consumer card balances.Discover Financial only offers consumer credit cards which accounts for more than 78% of its revenues. On the other hand, American Express derives around 58% of its revenues from this segment. Further, it also offers commercial credit cards that are not included in this analysis.Moreover, the difference in credit card revenues of both the companies is huge, and given the higher card transaction volume and better fees per dollar of transaction volume of American Express, it is unlikely that Discover Financial would be able to cross American Express’ scale over the foreseeable future.