Discover Financial Services

Q2 2021 Earnings Conference Call


spk_0: the afternoon my name is stephanie and i will be your conference operator today at the time i would like to welcome everyone to the second quarter twenty twenty one discover financial services earnings conference call all lines have been placed on need to prevent any background noise after the speakers remarks there will be a question and answer session if you would like to ask a question at that time please press star one on the telephone keypad if he should need operator assistance please press star zero thank you i will now from the call over to mr eric watches from at the investor relations please go ahead sir
spk_1: you'd have any in the morning everyone will come to do they call i'll be going on fly to have a earnings presentation which you can find financial section of our indoctrination website and better relations got discovered dot com our discussion today contain certain forward looking statements are subject to risks and uncertainties then he called out results to differ materially leader for to know if we're going forward looking statements that appear in our second quarter earnings press release in britain tension or call today will include march murphy or rather hard heartfelt and john green or chief financial officer or we conclude or formal comments will be time for question and answer session during a given a session the will be permitted ask one question fall by one dollar question after ball of question please return strength of our digital business model strategic priorities against the backdrop of continued economic him proven this quarter was no them first or card machine was groomed sequentially in may and june causing our period and receivables tv dot quarter over quarter this consumer spending and our account acquisition increase our car sproat this year and strong or growth in twenty twenty two
spk_0: second we benefited from again in our payment services segment this game is an outgrowth of a long underscores or payments that
spk_1: bill at each of forge innovative and lasting partnership lastly we achieved a historic low in delinquencies which resulted from consumers strong liquidity position or conservative stance on underwriting and a proactive measures we checked into the downturn to protect our credit quality this out border
spk_2: turn to them
spk_1: for his results were and one point seven billion dollars after taxes or five dollars and fifty five results included seven hundred and twenty million seven hundred and twenty nine million dollar one time game but even excluding this game our results were very strong had three dollars and seventy three cents per share drivers of the quarter strong results reflect the combination of our side execution and supportive macro conditions total sales were up forty eight percent from a year ago and twenty four percent key retail sales remain very strong and there was significant improvement in cheney cat by the pandemic even travel return to growth in june compared to twenty and sales volumes are accelerating the twenty four percent growth i cited is
spk_3: when he ninety
spk_1: we also see an attractive environment for account acquisition even we have removed nearly all of our pandemic credit tightening and have increased our marketing investment to align with these actions village decision support new account over twenty nineteen levels with strong growth among prime consumers as are differentiated brand and integrated network support our strong value proposition which centers on transparent and useful rewards outstanding customer service
spk_3: and knowing you'll feel feed
spk_1: while the aren't operating environment is broadly constructive there are also some challenges as we have highlighted before the counterpoint have sustained strong credit performance is high payment rates which in the second quarter world five hundred basis points above twenty nineteen levels
spk_4: we may be see
spk_1: in evidence that payment rates are plateauing and while we expect some you believe payment rates will remain and time even so we expect the strength in our sales figures and a contribution through the back half the here and accelerate and twenty twenty two
spk_5: as we have
spk_1: when we see attractive opportunities and actions we took this quarter with increase marketing expenses and investment and technology and analytics were an example of that approach these investments are consistent with our commitment to long term positive operating leverage and improving efficiency ratio as they drive loan growth and enable a more efficient operating platform in our payments business we benefited from again on our equity investment in marketa this game was the result of a relationship that began a decade ago and we continue to see opportunity and innovative partnerships i'm very excited about our investment in federal there was a week as we look to exp and our partnership with a leading by now pay later provider we also continue to grow a global acceptance presence and announced new partnerships in bahrain and portugal adding to the to network alliances that we announced earlier this year or debit business continue to build on a recent string oh spy him increase ninety percent year over year and was up thirty three percent from twenty nineteen levels in addition to the influence of economic recovery this performance reflects the greater a lot relevance of debit to many consumers through the pandemic period buy him a diners has also recover to some extent and was up forty one percent from the prior years loads however by and still below a pandemic levels and may remain so for a period of time the strong fundamental performance of our digital baking model go significant capital generation which is quarter was also aided by our equity game we accelerator share repurchases to five hundred and fifty three million dollars of common stock a level near the maximum permitted under the federal reserve's for order rolling net income test we remain committed to return capital for shareholders and going forward our approach will be governed by the stress capital buffer framework on our poll last order we indicated that we hope to revisit our cap return for the second half of this year and i'm very pleased that our board of directors authorize the new two point four billion dollar share repurchase program that expires next march we also increased or quarterly dividend from forty four cents to fifty cents per share with the current strength the us economy i'm increasing optimistic about our growth opportunity to this year and beyond our value proposition continues to resonate with consumers are painted segment is expanding it's partnerships and acceptance in our capital generative model positions us for strong returns over the long term are now as john to discuss key yeah spectrum our financial results in more detail peggy roger and good morning everyone i'll begin with our summary financial results and slide for as roger noted a result this current quarter highlighted the strength of and get your model valve execution on our priority and continued improvement in the macro economic environment revenue net of interest expense increased thirty four percent from the prior year excluding one time items revenues up nine percent
spk_6: net interest income with that five percent if we continue to benefit from lower funding cost and reduce interest charges reflecting strong credit performance
spk_1: it was partially offset by four percent decline in average receivables from the prior year levels excluding one time items non interest income increased twenty nine percent driven by the hired by higher net death count and interchange revenue to strong sales volume a provision for credit losses decrease two billion from the prior year mainly due to eight three hundred and twenty one million dollar reserve relief in the current quarter compared to a one point three billion dollars either built in the prior year
spk_6: and improvement in the economic
spk_1: an ongoing credit trying to the primary driver to be released next paragraph decreased forty one percent or three hundred and eleven million and the priory operating expenses were up thirteen percent primarily reflecting additional investments in marketing which was up thirty six percent and are you compensation which was up ten percent a chart where right off and a non recurring impairment a diners club also contributed to the increase our provide more details on expense drivers and outlook later in the presentation willing to loan growth and flight five ending loans increase two percent decline chile and were down just one percent from the prior year this was driven by card loans which increase two percent from the prior quarter and we're down to percent year over year lower year over year carried he will reflect to primary factors first the payment rate remains high and household continue the add a strong casual a position to be several rounds government stimulus second promotional balance were approximately two hundred fifty basis points lower in the prior year color paul guy ritchie was declined year over year we consider the sequential increase to be an important data point reflecting continue momentum and account acquisition and very strong sales that the hype payment rate remains a had going to receive a little girl on the we expect to see not a decrease in late twenties
spk_6: twenty one
spk_1: looking at a rather lending products organic student loans increase four percent from the prior year we are well positioned as we enter the peak origination heat personal lungs were that six percent driven by cried tightening last year and high payment rates we are encouraged by continued strong credit performance in a portfolio and have expanded credit for new originations
spk_6: moving to fly six yet interest martin was ten point six eight percent of eighth haven't basis points from the prior year and down seven pitches point sequentially
spk_1: compared to the prior quarter the net interest marching decrease was mainly driven by a nearly two hundred basis points reduction in the card the above right lonely have decreed seventeen data points from the prior quarter mainly due to the lower mortality rate cuts decline reflects the impact of increase payments as well as seasonal trans yield and personal loans decline seven basis points sequentially due to lower pricing student loan yield with got for based margin benefited from lower funny cause primarily driven by the charity and higher rate tv we cut our online savings rate of forty basis points in the first quarter and did not make any pricing adjustment during the second quarter average consumer deposits were at six percent year over year and declined one percent from the prior quarter the entire sequential decline was from consumer cds which were down nine percent while saving and my market deposits increase two percent from the prior quarter consumer deposits are now sixty six percent of total funding up from sixty five percent in the prior period looking at slide seven excluding the equity investment gains total non interest come with a hundred and twenty three million or twenty nine percent year over year net it can interchange revenue increased a hundred and two million or forty three percent as revenue from strong sales volume was partially offset by higher floor to cost loan fee income increased twenty million or twenty four percent mainly driven by higher cash advance he's with manned increasing as the economy the up it looking at sliding total operating expenses were up one hundred and twenty five million or thirteen percent from the prior year employee compensation increase pretty six million dollars primarily due to a higher tones the corona the current vs twenty twenty when we reduce be a cruel exploding this item employee compensation with down from the prior year as we'd manage headcount across the organization marketing expense increase forty six million from the prior year as we accelerated growth and best we filthy significant opportunity for growth and we planned to accelerate our marketing spent thirty year to drive account acquisition and brand awareness information processing with up to to at thirty two million dollar software right off the increase in other expanse reflect a ninety two million dollar charge and the remainder of the diners intangible assets partially offsetting nets was lower products back
spk_6: lacking some of the benefits from our investments and data analytics moving it's like nine
spk_1: we had another quarter of improved credit performance total net charges were two point one percent down at a one hundred and thirty two basis points year over year and thirty six faith point sequentially the net charge of rate was two point four five percent a hundred and forty five basis points lower than the prior year quarter and down thirty five basis points sequentially net charge of dollars were down two hundred and seventy six million versus last year second color and sixty two million fledgling the card thirty plus delinquency rate was one point four three percent down seventy four page with points from the prior year and forty two faces lol sequentially
spk_6: credit in our private student loans and personal mountains also remain very strong through the coin
spk_1: moving to the allows for credit losses and like can
spk_6: this quarter we really three hundred and twenty one million dollars from the reserves to be three key factors continued improvement and a macro economic environment
spk_1: staying strong credit performance with improving delinquency trends and lower life these were partially offset by a two percent sequential increase in lungs
spk_6: our current economic and some shouldn't include an unemployment rate of approximately five point five percent a year and and gdp growth of seven fifty embedded within the assumptions are the expanded child care tax credits and depend on the infrastructure tesco package beginning in late
spk_1: twenty twenty one looking at flight eleven our common equity tier one ratio increase eighty eight point six when elite fifteen point seven percent a level well above our internal target of ten point five percent is roger noted we are committed to return capital the recent board approval in creating our by back and dividend payouts reflect that
spk_6: and funding we continue to make progress towards that goal of having passed it seventy eighty percent or neck
spk_1: moving has like twelve our perspective and twenty twenty one continue to evolve as we see additional opportunity to drive profitable girl we have increasing confident in or out like for mana flown growth and twenty twenty one as strong sales and our new count grow to offset a higher payment rates we expect name will remain in a relatively narrow range compared to the first quarter levels of seven five percent with some quarterly variability similar to what we experience this quarter we and to pay a flight benefit from higher coop deposit maturity and enough for night funding that with yields affected by variability in humor about me
spk_7: our commitment to it's a to extend management has not changed and we remain focused and generating positive operating ladder and in improving efficiency ratio for this year we now expect non marketing and the a slightly over the prior year reflecting the higher compensation and kernels and recover
spk_1: repeat
spk_6: the increase in nice extent category is closely tied to the economic recovery for example the high level consumer liquidity is reporting elevate every piece recovery have some costs associated with them but i'm more than offset by lower credit losses
spk_1: regarding marketing expenses we expect this will step up more significantly in the second half a twenty twenty one and we further that by research into account acquisition and brand marketing
spk_6: with the continued improvement credit performance current expectation is a credit losses will be down this year compared to twenty twenty
spk_1: naturally and material change in the economic environment could shit the timing and magnitude of losses lastly as evidenced by car give it an increase in new share repurchase authorization we remain committed to returning capital to shareholders in summary we had another very strong corner we are well positioned for a positive top line trajectory given our sales trans and new account for him credit remains extraordinarily strong and the economic outlook continues to improve we maintained are discipline an operating expenses while and debt turning organic growth opportunities and finally we continue to deliver high return allowing for enhanced by back and dividends
spk_0: would that a turned a contractor operator helping the line peculiar at this time if he would like to ask questions please press start line under church downtown if he or a meteor yourself from the queue you may do so by pressing the pound key remind you to please to get your handset to provide optimal sound quality
spk_1: we'll take our first question i'm from john a pen cari like evercore isi morning morning just one of you can add more this one of you can get more collar on the piano rate expectation have i guess is what what do you see and it gives you confidence in the the moderate decline expected for the back half on this year and you can talk about that you know how you weigh the risks that the paper rate or may not moderate from here and then secondly on that anything any differences in your your fica bank in terms of the can rate behavior that great yeah i'll take the call or good question john thanks thanks to that so
spk_6: you know payment rates are are frankly or at a record high thirty is it looked at our trust qaeda you can see that in june
spk_1: they came in at and about twenty nine percent nets i go that's an all time high at least as far back as two thousand and five so what we're seeing what we look at the portfolio not the portfolio the trans or similar but the elderly payment rates
spk_6: at that lower and what what we're seeing is a couple factors so what else
spk_1: i'm a key salaries and of the curl up in a right and second you have we formed our expectation and the second half of the year based on all of the government programs that are out there and most of the most significant ones are expiring or have expired by the end of third quarter so we expect that coupled with the strong economic activity and lower savings rate and that we're observing to result in a lottery decrease in the payment ray certainly in the fourth quarter in the third quarter it you know it could be it could be flat kill maybe even up a mild that like but our overall you know our senses that we've reproached at the peak of it and and it's kinda begin to tell our killer and in terms of the next by five go band yeah yeah it's pretty broad certainly does the higher five go skew transact are so you'll have a higher payment rate in from the mid fight goes you seen revolvers turn transact are bad but again to to john's point we do expected gradually to normalize
spk_6: a great now that couple and then separately and i appreciate the from the commentary around the longer facts that king shannon
spk_1: and you also expect some berry gordy and in your margin soaking who have been set imply for your name interesting calm expectation get the if you can elaborate a little bit on that in terms of the second half trajectory there and and possibly going into twenty twenty two
spk_6: yeah so out of touch upon so you know the net interest income i you know both will fall alone growth
spk_1: as you know in the fourth quarter
spk_6: the build a loan balances is skewed towards the last last two months of the quarter so you know net interest margin it is yet when i'll say the trajectory is changing and i'm in a positive direction get a sequential loan growth we saw from first quarter the second quarter
spk_0: but again
spk_1: you know it it's gonna be in in in single digits margaret lover single digits this is the general expectation your next question comes on the line at a sanjay a sec ronnie when kbw thank the morning it's my first question as i know everyone's her waiting for the consumer we love our and as positive signs that maybe roger you could to speak to the competitive environment i mean obviously everyone is chasing growth are wanting to grow medical to speak to how how it out there yeah thanks i'm jay you know as we discussed in the past that the card businesses always competitive you know there there was a nice little low last year that that with what the take advantage of and and pick up you know even more market share but i i think this is returning to out more normal you know maybe a little heightened but more normal level of competition you're seeing new products out there increase markings band but as i look at our value proposition prosper accounts were achieving and and the returns i feel very very good about that the market think spanned were putting out there and what we're generating for it okay great my follow up and on on the federal investment obviously there and up and coming by now pay later company and south korea sort of if you could speak to that specific in that span and to added how you feel that unfolding for yourselves and both in terms of the investment itself but office to teach ugly inside a by now pay later sure show in terms of our by now pay later strategy they're they're really two parts that the saddle investment is really being driven by the payments side and had similar to the investment we need and marquette a while back you know our our are set of network as are very useful for many
spk_0: finn tax in terms of just an easier way to process payments and connect to merchants in a wide variety of form show georgia that's the core of what we're doing this zazzle we also believe that potentially time there may be opportunities on the banking shy so in terms of are providing landing not necessary
spk_8: early would which says oh but in the by now pay later space more broadly but again leveraging you know what we can do with unsecured lending and all are direct merchant relationships that i can we haven't announced anything under under lending side of by now pay later at this time
spk_9: your next question comes from ryan nash with goldman sachs
spk_1: hegemonic at my morning i'm john of roger king maybe just talk about the expectations for monetizing the market again how much to expect to reinvest vs use hurry purchases is already factored into the buyback second team exits remind us what thought what the lock up his and and your intention for for the steak and maybe just laughs
spk_6: lay it out needs it needs increasing expensive that we have right now marketing and marketing investments how much these are being driven by the market again and to be expected to be one time in nature or should we expect them to stay in the run right thanks okay
spk_1: eric ryan think so you know the market again when something that when we when we looked at at the plan for the year you know we didn't frankly invasion it you know that that opportunity would you would turn out quite way it did so certainly an anti so can't you know that the the spend that we're seeing it isn't isn't dictated based on that side of the market again but more but abroad economic opportunity that we're seeing right now to be able to drive positive grub south likely we will be spending at at his level with or without the market again
spk_6: the
spk_1: the
spk_6: canada locked up in those those points are disclosed in the us one so so you can you can reference latin and get roads that says he on it
spk_1: and then finally in terms of the expenses and on a one time in nature self within the presentation itself we highlighted and of three three items that were significant or one one with the bones a cruel and unrelated to to marquette it again and done more broadly a reflection of what what's happening in the business and and and the outcomes were sitting here in terms of generating an returns the the other the other item there was the kind words and can dribble wage
spk_6: we took we took the opportunity based on what we see and to change in that and a cat lungs and diners to to fully impair pair that
spk_1: and talk and ninety two million dollar right off and ended the third the third item least i was a thirty million dollars software right off south some all those are part of our normal i'll a hygiene factors the last the last two items were you know what i would consider relatively one off and i'm i when i when include those and in the kennedy operating cash flows going forward but as you're trying to get a sense our overall spend in
spk_6: in twenty twenty one we talked about accelerating marketing and stuff so the way i would think about marketing specifically is that
spk_1: we anticipated to return to two thousand and nineteen levels
spk_6: which which would indicate a you know the material acceleration in the second half of the year which again is tied tied kid in fact that working good origination opportunities to drag growth and long term profitability
spk_1: got it thanks for the call and maybe i my follow up so in a you and out the new two point four billion dollar by back by just given how high the levels of profitability i hear you're still be well above that ten and a half level so kinda images help us understand the strategy of getting the capital down over what timeframe are you managing i'm all into to see people day one and then maybe a know how a that roger you know you talk about potential lending opportunities and by now pay later we've seen others take some the added organically some go via acquisition you know what what what would you expect to be the strategy for discovering to go forward basis thanks the the i'll i'll hit the capital point real quick and then we'll we'll flip it over to her roger that handle it back and second part of that question the second part of that second question actually check though the doctors were some one we want to be prudent and entered our distribution to capital make sure that that we organic or that we allocate or cabinet organic growth africa nice and into and and by deck and and dividends and then acquisitions as as far as they appear you're the young so that hasn't changed whatsoever the then in the planning in terms of capital overall is that you know we are committed to that tenant ten and a half percent you know as we look at the impact for the sea so capital relief transition that's about two hundred basis points and then and then
spk_0: in in the first quarter of next year to towards the end of this year as we review the outlook for twenty twenty two with board
spk_1: well i will make recommendations weird with a couple points in mine the f t v and and where we are with that and there's plenty of room there and and can find the approaching that and and in terms of by now pay later very there are many girls are different things we could do you know clearly going direct with a merchant relationships we have is one option we could work with partners a i think the market is still very image can combinations and it'll a bob of over time bag we we don't have anything specific share shared this time
spk_0: your next question as from dawn fan daddy with wells fargo
spk_1: i can morning on blogs are kind of a bigger picture question or on technology stand on just want to get your thoughts on where you know year college right now whether you're kind of making and up and definitely a i've seen running on staff and on in different financial teaching to the different conflict cycle yeah armed he is a major source of investment for as a and i would say that the scarce asset there is power as opposed to technology dollars and then or that is just making sure you're investing to monetize the there you know rain you are you can pick up with enhanced a an analytic so looking at big entire martek stacked your personalization abilities what you can deliver through different channels so it's a big fan august i think we're probably the only major bank where the head of data and analytics as a direct report the ceo and yeah i think that reflects the the importance we see on that i feel very good about our level of and best your next question as from bob nepali what well young player thank you for sharing it good morning catch question i get to follow up i get on roger a year and index mention my like marquette marketa and settle and just added that the the how are you working with my marketa how are these investments add it in treating ah the he had in the potty sad if he would have for discover and are there yeah more have these types of investments or could they become acquisitions not the feature ah i'm sure show you know all of these investments start with a commercial relationship we are not venture capitalists we have no desire to get that business
spk_6: by where we have a commercial relationship with a company where we think there's a lot of potential and there's a way to invest and perhaps extract additional turns maybe an exclusive arrangement or other commitment those are the types of opportunities we pursue and they're largely on the
spk_1: heyman side and we may even given some of the off these were seeing accelerate that although again it it's going to be relatively modest in terms of the acquisitions given the valuations
spk_10: the i'm not sure i necessarily she doing acquisitions and and this approach around partnership and investment seems to work well but we will look at john and our rpg mab a very strong business development effort and will consider acquisitions where exactly ability that will help us marginalized our image assets
spk_1: thank you gotta follow up on march tenth value chart on page six the acceleration to the quarter of relativity thousand and nineteen and are you surprised by the level of stand and that were seeing and how do you think about that relative to the long term trend i guess if you either take yeah it's quarter you may be at it and percent clinton great from twenty nine plan but
spk_0: are you surprised by deaths and a celebration true the quarter
spk_1: and your thoughts one stand great yeah you laugh at you look at twenty eight twenty two and onward
spk_6: yeah i mean i i think compound growth is is a very challenging never could it smooths an unbelievable cycle the out again he was would have expected into a nike show you know that the here we are spend growth numbers are unsustainably high for the economy's a whole economy is growing above i think when when it comes with
spk_1: say it it's we'll level should be and so you're saying that hand up demand from consumers yeah we're expected to normalize it a strong level and and would we want to continue gain market share given how are positioned but i think anyone is expecting yeah week else fails to stay up thirty percent forever
spk_6: your next question comes from mark give recently barclays
spk_1: yeah thanks had a question about the reserve levels and he was from stanford what your kind of contemplating both from i don't think charge up perspective it and those reserves and i think yet trend had obviously been very benign and yet you're still almost two hundred basis points about have your see full day one
spk_6: what are you what do you need to feed it to see those reserves come down more meaningfully
spk_1: if done bark bark thanks thanks for the question so when when we approached the quarter certainly the economic aid it was improving a portfolio is performing extremely well and you know the charger trajectory
spk_6: we provide their guidance and now now believe that a be below love the prior yourself through all those are very very positive
spk_1: comment reserving point we we did put a bit of caution in a in the and reserve numbers as a result of the various government programs that around out there so you think about the eviction moratoriums for closure moratorium very payment referral program and then that the massive amount of government track transfer payments it had economy we we felt like the those those contributed to driving delinquency and charges love historical norm for our customer make some undersea thought we reserved for life of long and accordingly we were waiting for those both programs to run their course
spk_6: i'm and cash to can feed through the economy and and impact our customers
spk_11: and then be able to make make you know the corner deeper and deeper change to the reserved levels so much as i said earlier most of those programs
spk_12: on render course in the third quarter we actually have the child child care tax there's a child tax credit
spk_6: we don't expect that to be an act some in the fourth quarter
spk_1: we should begin to see more data that would allow us to take a different look at reserves and then into into twenty twenty two certainly it out our expectation is that that than credit environment is is is very very positive from from a girl standpoint and accordingly will will make reserves that term and of align with that
spk_0: okay got it
spk_6: and then if i'm a question is do you have any other private investment fund it did look like they could be in a large came to this and just based on any kind of subsequent funding rounds and an evaluation the other done it
spk_13: so are we on it you know what we we have some the yes
spk_6: we try to get in early and build out the commercial relationship is roger alluded to and you know we're hopeful that the combination of ah
spk_14: working with quality company and developing deeper commercial relationships won't help those folks to be profitable and help
spk_3: help us drive business in or payments payments area while getting us an option value for that investment so one would hope that there's more been at at this point it would be way premature that speculate
spk_1: your next question cause for man you treaty rewrite from the b s good morning guys good morning good morning thanks for taking my question he gets it you talked a lot about that the benefit of having a differentiated products with flexible cash rewards now if things get back to normal and trouble he was become more golden for consumers are you seeing any impact you your utilization levels during any indication that consumers might have each shipping preference for and travel and my story was overcast rewards and get a we we've been successfully marketing cash rewards against travel more than every other type of court out there for decades shy when get too caught up in said the shift away from frequent flyer miles and in twenty twenty at a point do sort of the stability and and structure of our program that we didn't have to make a series of changes we focus on you know continuously enhancing it go a lot of people don't focus as much as we do on redemption show the belated to redeem that point of sale at amazon your partner page our van zyl we are confident that meet
spk_0: can compete with the travel rewards programs a lot of the miles cards really target the the super prime trains actors which is and yeah ours is much more land focus model with yeah we've got a very good miles guard ourselves that we market but again like i feel really good that our rewards can compete against anyone out there
spk_1: okay thank you for that and just as a follow up on how it how do we think about their rewards meet at you think about growing non bounces for example there anything to that yeah the on of now communists on so he on you know there around three over time than you know relatively stable it's increase know somewhere between one and and three pit annually in a we expect that you know that five percent programs and a reward structure will continue that trend while helping us this was a you know a strong level of customer loyalty so we look at that and at and a natural evolution of a good and investment in our customer relationships k thank you very nice thanks for the color of the guys
spk_6: and cake your next question comes a rich chain with jp morgan
spk_1: oh yeah i think you're taking my questions i'm mark really covered ah what i wanted to talk about in terms of reserves but i'd just like the follow up on that slightly
spk_6: the observation was maybe reserve rate is about two points higher than it would have been on game was on day one was essentially an ideal economic environment low unemployment ah steady growth etc should we look at day one as a destination
spk_1: gene for world where the reserve rate will go or more is a channel marker incomes of sort of an ideal operating a buyer yeah a good question so you know that the short answer is that it depends on on economic outlook and and a portfolio performance and would stay together kind of view on the marker you know when we look at the reserve right
spk_6: back in college january one
spk_1: the lack of interest over six percent were at just under eight percent now that difference is about one point seven billion dollars of of reserves an undercurrent long book
spk_0: duff if if we have a level of confidence in in the economic environment for further continues to be positive and
spk_10: and then
spk_14: the work we've done on analytics dry alcide continent credit performance in on earth and expectation in and benign environment that we should march back that way now i think it's premature to time we'll get there
spk_1: as a lot of factors that could change but i look at that day one as as a marker for a solid credit environment and you know and relatively strong performing credit book
spk_6: great okay that's very helpful thank you guys your next question cause on bail car catchy way the wolf research
spk_1: thanks for morning roger john
spk_6: good morning everyone can either it's help square that continued shrink customer acquisition that you expect on one hand with peanut rates are meeting low for an extended period on the other you mentioned a job that the end of the pandemic related but federal forgets programs a summer as a catalyst for payment rate normalization but
spk_1: what ethnic came to reach or me an elevated after that sport has ended
spk_6: yeah have of have started and then maybe roger had a couple of points on the back and so felton you know certainly if you look at likely than projected gdp that that above normal levels through a dancer on us economy and as well as a result of frankly all of the activity and that the the transfer payments i talked about earlier the i think there's a natural outside transition from where we are today kill something that that approaches historical norms
spk_1: the savings the in other savings rate is still high but it's falling and so that that positive and in terms of overall sales activity versus payment rage the
spk_10: yeah we do we we do expect say that failed levels at some point to moderate
spk_6: you know what partly because of your of your current and partly because of what's happening on economic activity
spk_1: but with that said
spk_6: i'm i would expect that payment right there there's a bit of an inverse relationship and know what we're seeing from a growth am and
spk_0: it sailed activity
spk_1: the new account acquisition the payment and riot have been a the had land and i that revile trans actor rate
spk_0: aligning to payment right but despite all that we've been able to grow from first quarter the second quarter so so that payment rate moderates a bit south activity i think we'll be at of lag to that and will learn wow
spk_1: will be well positioned to grow and and afford quarter okay helpful think it is as if i may follow up on that as we look at it to next year would you expect that process of you know that that you've described the sort of this this payment rain or of all right normalization should that provide an incremental pale went along growth such that we can actually see your long growth starts our are stunning of you know twenty twenty two it down
spk_3: but six punch line at six months away so young weren't we're working on it right now
spk_1: i'll tell you this i'm i'm positive in terms of how the businesses position and let them what we can expect from the top lines and point as well as you know credit expense out on those factors i feel very good about been to they get into leveled at the facility at this point probably better early your next question as font mange outlive deutsche bank i got my in think there are kicking my questions
spk_0: the lungs out he has we hadn't the third quarter and salad the first time of year a problem that he cautioned on campus mom gets a you do anything differently can see how you're from change he started that's pretty good school year and origins of to say that not mocking too distant is going to be a large pizza that salary mocking spend the you guys had come them
spk_15: you're you know the in the third quarter his peak he's them for student loans bed you know all the marketing is done before they get to campus
spk_1: volume was suppressed last year because for for many of our customers we encourage them to take federal student loans and then use our private student loans to top off and if are expenses were lower because they're paying tuition but not paying housing and food etc that that had an impact on our by him on the other hand we could benefit last year for i had a major competitor pulling out of the marketplace show i would say we're we're optimistic way that kid going back on campus that this will be a strong year for originations and that we will continue to gain market share in this to my product
spk_16: that's right great arm and and secondly like you mention i'm crying hop and dudes consumer on court date have you seen i get to continue acceleration in in expanding and album roughly point you need to their quarter and then secular i can be in or unsustainably hi i'm just curious if you had any
spk_1: for the call it to when you expect that that this with an omelet i'll start with without one yeah i think it'll take a while to normal on a very good amount of pent up demand but also pen up liquidity in the in the form of the skating that have build up as well as just the open the by the people have on their cards from sort of month after month of a pretty high paying a great show i think that will provide by some support on other hand you know huge amount of uncertainty in terms of what will happen with the delta variant and and other factors that they can drive the a comedy show yeah we feel like a well positioned by go unclear what the back out of the year will worrying in terms of what we're seeing so for this month i would say the of travel continues to be constructive but overall you know not necessarily accelerating that spend level staying very strong your next question and some moshe or him back with credit suisse great thanks am i guess guy getting back to the to be npr with that it it is your primary revenue alert or gross you know kind of opportunity to settle on the landing site is that the way we should think about it no you should think about it under the payment segments show transaction processing revenue answered am with payment processing answer of conductivity to the merchants up
spk_17: ensure that that sort of our our first entry into by now pay later has been more on the payment services segment as opposed to are direct fainting side
spk_1: gotcha
spk_6: one of the things that you've talked about i'm asked about by now pay later is fair you know is that could a question of whether it kind of encourages or or you know discourages younger consumers from taking out a credit card make the you had said day we don't last caller one of the presentations that because of didn't lending brand of discover that you haven't kind of seen that in package talk a little bit you know about
spk_1: how you think about that their value i guess of the student lending
spk_6: you know in terms of kind of and in in in terms of that marketing at the discover brandt sure you know we we are very successful in the students or business i think this to won't help but also has to do with the product the value proposition and you know some very good marketing and which he actually brave credit performance from students because you know contrary to popular belief allow them are very responsible and in how they handle their cards yeah when student loans and start by saying we think integrated it's profitable i would say it is operationally complex
spk_0: but it also gets our brand out there with
spk_1: parents as well as students were making a series of financial decision so yeah they're not that many banks that are in it as scale not that many to that have sort of the products said did we have to be able to leverage those relationships so it's a it's a key part of our banking strategy and just as a quick follow up on the reserving point i guess i was sort of wondering if you know eat the if you're reserves on day one included an expectation of a potential of a recession somewhere in the life of those receivables just as you think about it as we can entertain
spk_18: only twenty two would that be a lower probability just given the experience that we've had our is that think about it
spk_1: yeah so when when we get day one we look at through the sake of you so so what essentially that mean is we didn't look at the trough the link which fees and charges nor did we look and tweaks know to extremely oversimplified a bit of averaging with the help of a bunch of data scientists so you know that day one is a con a normalized you overcrowded environment your next question comes from my her battier way that bank of america hey than a think you have taken the questions and be bonnie morning i wanted to have to go back to you click on it and competitive intensity and it certainly does feel like you know cash back dogs has increased and give you did to intensity the a little higher than maybe the average this article some you can just talk little bit more about the dimensions of this competition is spending a little beyond just hire you know director was like at one point five percent or two percent was using any irrational signing bonuses introductory offer you know spend five thousand dollars and three months get underdogs up and eat anything iraq
spk_0: national are you seeing anything he on the balance transfer inside the color responding to this increased competition and is then it in the include even marketing spend in part because of this elevated competition yeah so dollar store with the back at the increasing it in the increase in marching spanned is driven really by the opportunity bc so it is not by the competition you know i do expect the costs are count to the mods we higher than say twenty nineteen bubbles twenty twenty was extraordinarily good but that at a bar that has to do with just bookie more new accounts and and a marginal ones tend to be more expensive
spk_6: you know i do think some of the rewards products out there will not be sustainable long term you know you've gained two percent as back offers come and go for a very long time
spk_1: especially when we eventually get to a higher rate environment the oh so far balance transfer demand is still a bit suppressed show we're not seeing the overly long twenty four months your present offers you are starting to see some of those high yeah spend four thousand and get four hundred type offers from some of the
spk_6: issuers but i think our our most aggressive around growth that again nothing that that i would say we haven't seen before it can be different people at different times but go that this is or the card business and what we're used to competing against
spk_19: great thank you are an interest of the for the ask about your debit product any update on that and that you know we we have been about always we that be your lucky that on states bang the marketing of of behind that does any update on the dammit product thank you
spk_0: yeah so you know the given the the excess deposits we had we really pulled back on that the vast majority of our deposit marketing and putting that product but we're very excited about the differentiation you know having cash back show you know we think we're well positioned against the challenger banks as well as traditional banks so will will continue to ramp it up
spk_19: the probably more so towards the back the year and as we get into twenty twenty it thank you
spk_0: stephanie i think we have time for one last question your last question comes on etsy graphic away that morgan stanley
spk_1: hi thanks on so i just had to one is on into marketing i just wanted to make sure i understand what you meant by marking on expense anticipated return to twenty nine keen levels are you saying that the back half a twenty one will be at a run rate similar two
spk_0: full year twenty nine keen or the back half of twenty one is going to be similar to the quarterly run rate of twenty nineteen
spk_1: oh so they think total year
spk_0: twenty one to be similar to como year

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