Discover’s Personal Loan Strategy: More Contrarian Than FinTech
With all of the activity in the FinTech space surrounding personal loans in recent years, we thought we would go “old school” and take a look at the personal loan strategy of Discover. As context, Discover launched its personal loan product in 20071 with a primary focus on penetrating its existing customer base via pre-qualified offers. Not to re-open old wounds, but this was at a time after many banks suspended or suppressed their personal loan offerings during (or because of) the credit crisis. To say that personal loans fell out of favor for banks would be a gross understatement – Capital One, Bank of America, GE, and others were experiencing high loss rates and throttling back at breakneck speed. Many learned the hard way just how valuable the revenue and risk levers available on credit cards were relative to personal loans. Fast forward to the FinTech revolution and the product of choice is the personal loan. It is somewhat ironic to see the word disruption associated with the personal loan, arguably one of the oldest consumer loans products in the history of U.S. consumer credit. However, the FinTech community saw a market void – marketplaces, new direct lending platforms, and purchase finance engines powered by slick technology interfaces proliferated.
Because Discover launched its product in the teeth of the Great Recession and without the fanfare of FinTech, we thought it would be interesting to review the strategy and performance of the Discover Personal Loan portfolio. In many respects, Discover pursued a contrarian strategy – when others were dialing back personal loans, Discover’s management team saw an opportunity. As context, Discover viewed personal loans as a logical extension of its brand and capability set. At the time of launch Discover felt there was an opportunity to attract high-quality loan balances, mainly credit cards, amid the severe industry-wide contraction of home equity and other forms of consumer lending. It was a bold move at the time as most banks were quite bearish on personal loans having experienced an uptick in loss rates and reserved for much more.
As shown in Figure 1, Discover’s personal loan balances have grown to nearly 9% of the total loan portfolio at an average annual growth rate of ~25% since 2009. The metrics outlined in Figure I are quite favorable and are consistent with the disciplined manner in which Discover diversified into personal loans – it was not marketed in the open market and was targeted to existing Discover customers. In fact, approximately 70% of the company’s personal loan customers have another relationship with Discover. Management continues to differentiate the Discover personal loan by focusing on simplicity and transparency with a no fee product as the foundation (as long as you pay on time).
Figure 1: Discover Personal Loan Metrics
So what does Discover’s journey into personal loans tell us? Clearly, there is consumer demand for the personal loan product hence the wave of new entrants such as Lending Club, Prosper, Avant, Marlette, etc. Across the personal loan landscape, there are also different ways to serve the market. Discover pursued a relationship strategy; new entrants pursued the open market albeit with a range of platform plays including direct-to-consumer, peer-to-peer lending, etc. Quietly, relative to FinTechs, Discover built a $6b+ book of business in a very methodical way at a time when legacy players were retrenching and a wave of new players were entering. Discover appears well-positioned especially in light of its access to funding and years of expertise with this asset class.
1 Per DFS 10-k filing for the period ending November 30, 2007.
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