Discover: Late Fee Curbs Will Have $80 Million-$90 Million Impact On Earnings

Posted on 28. Jun, 2010 by Collections Recon in Collection News, Press Releases

Discover Financial Services’ (DFS) Chief Executive David Nelms said Thursday that rules curbing late payment fees charged by card issuers will “have an $80 million to $90 million impact on earnings over a 12-month period” following their implementation in August.

Discover and its peers, including card issuers Capital One Financial Corp. ( COF), Citigroup Inc. (C) and American Express Co. (AXP), are coping with legislation passed last year that takes a bite into income. Rules enacted earlier this year include restrictions on rate increases.

The Federal Reserve earlier this month issued the final rules on penalty fees, also related to the credit-card legislation passed in 2009.

Starting Aug. 22, late payment fees charged by issuers will be limited to $25 or the minimum payment due by the cardholder, whichever is lower, eliminating the typical $39 fee that issuers currently charge late payers. Card issuers are allowed to charge $35 in late fees to repeat offenders within a six-month period.

Nelms said in a conference call Thursday to discuss Discover’s second-quarter results that the company intends to use additional funds to pursue growth opportunities, including increasing its marketing activities.

“It is premature to do anything more in terms of capital at this point,” he said, ruling out returning cash to shareholders at least in the near term.

Earlier Thursday, Discover reported a 14% jump in its fiscal second-quarter earnings as improving credit trends allowed the company to free up funds in reserves and cardholders spent more. For the quarter ended May 31, the Riverwoods, Ill.-based company reported a profit of $258.1 million, or 33 cents a share, up from $225.8 million, or 43 cents a share, a year earlier.

Discover shares recently traded at $14.44, up 3%.

Unlike most other card companies, which either issue plastic or process the transactions, Discover and bigger rival American Express do both. Therefore, in addition to the interest Discover earns on its credit-card loans, a chunk of its revenue comes from fees it charges banks and merchants, such as grocery stores or gas stations, to process card payments.

The more times consumers use Discover-branded cards and the more they charge on them, the more the company earns in fees. Discover customers spent $22.9 billion on their cards, a 6% jump from a year ago.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha- bubna@dowjones.com

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Tags: Discover Financial Services, earnings, Impact, Late Fees