Discover CEO says card reform brings higher fees, fewer perks

Discover Financial Services Chief Executive Officer David Nelms said new U.S. safeguards for credit-card holders will mean higher interest rates, more fees and fewer loans industrywide.

"There are many consumers that actually will not benefit," Nelms, 48, said yesterday in an interview after Riverwoods-based Discover reported second-quarter results. "Some of the unintended consequences are going to be difficult for customers."

President Barack Obama on May 22 signed into law limits on credit-card rate increases and penalty fees and curbs on marketing. The law was passed after complaints that credit-card firms deliberately confused customers to drive up costs. MasterCard Inc. said this month that some of the industry's practices were "unfair" and "deceptive."

Discover won't be hurt as much as some competitors because it didn't engage in some of the disputed practices, Nelms told analysts. Still, the U.S. rules will drive up average annual percentage rates on card loans and consumers may find it harder to get credit, Nelms said in the interview.

"Most consumers have benefited enormously from risk-based pricing," Nelms said. "Those that kept their credit in good standing have had historically low credit-card rates over the last 10 years. I see that unwinding."

He told analysts on a conference call yesterday Discover will pull back "dramatically" on offers to transfer balances from competing cards at discounted rates, and that the discounts may not last longer than six months. Some banks have offered balance transfers at 0 percent rates that last more than a year.

Discover will keep its "cash back" program that refunds a percentage of a cardholder's purchases, Nelms said. He said the company doesn't have immediate plans to impose an annual fee.

More Legislation

Nelms said Congress should reject separate legislation that would empower the U.S. Justice Department to regulate rates that credit-card networks including Discover, Visa Inc. and American Express Co. charge merchants with each swipe of a payment card. Retailers are seeking an exemption from antitrust rules so they can bargain collectively with card companies for lower prices.

"Messing with the competitive market I think is not a good thing for people that believe in capitalism," Nelms said. "I don't understand why we'd start messing with something else before we've even finished implementing the most extensive changes in the industry's history."

Nelms said there's no rush to repay the $1.2 billion Discover borrowed in March from the Treasury's Troubled Asset Relief Program. Discover's capital levels and write-offs of bad loans are better than those of American Express and Capital One Financial Corp., "which would suggest our ability to repay," he said. New York-based American Express and Capital One, based in McLean, Virginia, returned almost $7 billion to the Treasury's bank rescue fund this week.