So… Now what is a top stock to buy and hold?

by Finploris
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Discover Financial Services was spun off from Morgan Stanley in 2007 and currently runs a lean online bank and two major payment networks.

The financial company owns the famous Discover brand, which is one of the four major credit card networks, along with Visa, Mastercard, and American Express.

Here it is everyone… just the facts.

In recent years, Discover has also built an online bank that offers a diverse range of checking accounts, savings accounts, personal loans, student loans and real estate loans for consumers with strong credit scores.

The company also owns the Pulse payment network (an interbank electronic funds transfer network) and Diner’s Club International (a charge card brand).

Discover is widely used in the United States, yet is not nearly as accepted internationally as Visa, Mastercard, and American Express. This is a disadvantage from an obvious standpoint, but also an opportunity of potential growth for the company if it can expand internationally like the other three well-known card networks.

What do we notice here…?

As an important note, Discover is both a bank and a payment network. Visa and Mastercard focus exclusively on operating payment networks and do not hold credit card loans on their own books. Issuing banks, such as JP Morgan, Bank of America, and others do that.

Discover and American Express, on the other hand, are a combination of payment networks and banks, so they operate the payment networks and hold the credit on their own books. As a result, they take on credit risk but earn significant interest income from that lending.

Know when it’s a good run.

While credit card debt has one of the highest default rates among the various types of debt during economic downturns, it allows the bank to earn an annual return on equity of over 20% during normal years in most cases, which is excellent.

Of course, credit card networks have a very wide economic moat because of the network effect. The more cardholders want to use their card, the more merchants are willing to accept the card as a payment method. And the more merchants accept the card, the more cardholders are willing to use their card, creating a vibrant cycle.

Admittedly, this is somewhat tempered by Discover’s relatively low international acceptance.

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