David Nelms, CEO, Discover Financial Services

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

DAVID NELMS, CEO, DISCOVER FINANCIAL SERVICES, TALKS ABOUT DISCOVER AT BLOOMBERG TV

MARCH 23, 2011

SPEAKERS: CAROL MASSAR, BLOOMBERG NEWS ANCHOR

MATT MILLER, BLOOMBERG NEWS ANCHOR

DAVID NELMS, CEO, DISCOVER FINANCIAL SERVICES

15:04

CAROL MASSAR, BLOOMBERG NEWS ANCHOR: Joining us now in an exclusive interview is Discover's CEO. He is David Nelms, David, good to have you here with us.

DAVID NELMS, CEO, DISCOVER FINANCIAL SERVICES: Nice to be here. Let's talk about the quarter because you guys did kick up your dividend a lot. Your stock has done well. Why did you feel like you had to do more for shareholders?

NELMS: Well, we were the first company who had cut its bank dividend to fully restore the dividend. And we were able to do that because of our very strong performance, both on earnings and total capital levels.

MASSAR: Do you expect those strong performances to continue?

NELMS: We certainly think that we are well positioned. Credit is improving. Sales are growing and absolutely we expect to continue to performing well.

MATT MILLER, BLOOMBERG NEWS ANCHOR: What is going so right for this company, the stock up 350 percent over two years. You are looking at, what, 50 million card users now. What have you done right that the other guys haven't been able to do over the, sort of after the financial crisis?

NELMS: Well, certainly Discover is both a network, as well as an issuer, and credit therefore is very important to us. And I would say we were pretty careful with our credit going into the crisis. And certainly we had to customers who have lost their jobs, or had underwater mortgages, and had trouble change, paying their bills for awhile, but we have recognized those losses and our customers are doing much better today.

MILLER: What kind of customers are you looking at? And I'm sure Carol was about to ask the exact same question.

MASSAR: It was very -

MILLER: What's your target audience here?

NELMS: Well, it's very much the prime market. We - about one in four US households have a Discover Card, so it tends to be a very broad customer base. And it's families, it's professionals and we are very careful.

It's basically people who love to get cash rewards. We are the leader in that. We started cash rewards and we pay out over $700 million a year in cash back bonus awards. That appeals to a lot of people.

MASSAR: Full disclosure, my sister has one. She loves the cash back rewards. Let me ask you, though, what kind of new trends are you seeing among consumers, specifically, in terms of their spending habits? Are they spending more? You are not seeing as many defaults. Give me some indications here.

NELMS: Well, we are seeing some encouraging signs. I would, did characterize as a slow, but increasingly steady recovery. Our first quarter, our sales, Discover Card sales were up seven percent year-over- year. That's the best we have seen in awhile.

We are coming off of five quarters now in a row though of increased sales. In the last six weeks we have seen even better sales. So I attribute part of that to the rising consumer confidence and hopefully those, that confidence will be here to stay.

MASSAR: Do you worry, though, about everything that's going on in the world? We spent so much time, understandably so, talking about what's going on in Japan, but there is concerns in the Middle East. There is concerns over in Europe and how that might play into the consumer psyche.

NELMS: Certainly. You can add the gas price increases to that.

MASSAR: I think so.

NELMS: There are things to worry about and that's why I am a little guarded. We have six great weeks, but I am hoping that it will continue. So far I don't, I personally don't feel like we have had enough bad news to knock the recovery off its course.

MILLER: What about making it easier to pay for stuff? We were just looking at video of iPhone cases that have your logo on them, Blackberries that have your logo on them. Obviously paying for things over the Internet is becoming more and more important. What are you doing to make it easier for the consumer to buy stuff?

NELMS: Well, one of the things we are particularly focused on is mobile commerce. And we are doing a number of things in this area where you can tap your card or put a sticker on your phone, tap that at a point of sale and buy things from Best Buy and other retailers.

And we are also partnering with Isis, which is a joint venture between T- Mobile, Verizon and AT&T. And we are very optimistic that over time consumers will increasingly pay using their phones and that our, will be the network to bring those over.

MILLER: I have got to say I have been covering phone companies for a long time. I have been hearing this forever. Deutsche Telekom was talking about this, you mentioned T-Mobile, back in 2000. When is it really going to happen? When can I walk to a supermarket and just chuck my phone at the cashier and make it work?

NELMS: Well, I have been doing it for the last year. Some of our customers - you can get a sticker today from Discover, any of our customers can, put it on their phone and you can walk into Home Depot, Best Buy, McDonald's, a host of major retailers, over 100,000 retailing locations across the US today and do exactly that. Now, what I look forward to is the day when all merchants have those wireless terminals and when all phones have this capability built in, because I think that will be great for Discover.

MASSAR: David, it's funny. On our conference call when we talked about that you were coming on we said, who really has a Discover Card, because you guys are kind of under the radar. Yet I'm looking at projected numbers for 2010 in terms of Amex and you guys are pretty comparable in terms of the number of cards. Does it bother you that you are not kind of always talked about when it comes to the card companies as much, or you don't care because you are obviously delivering the numbers?

NELMS: Well, I think we recently we have really been taking our profile up. We have only been a public company for about the last three years. That has helped raise our profile.

We have got some great commercials. We are the sponsor of the Orange Bowl. So we have really been trying. What bothers me, or what excites me maybe is the opportunity to take up the profile and to get -

MASSAR: Is that important, do you think, in terms of leveraging what you guys have?

NELMS: I think it is because we offer the best service in the industry in addition to cash rewards. And I want to have all consumers have access to that.

MILLER: Can you match, though, a Visa, a MasterCard? Can you get to that level of recognition?

NELMS: Well, we are really close today. We are one of the most recognized brand names in financial services and Visa and MasterCard are a very high hurdle.

The great thing about Discover though is we have direct relationships with merchants and card holders. We are vertically integrated so we do much more than just Visa and MasterCard. So I want to offer the full range of products and services to consumers in direct banking and payments.

MASSAR: Talk about the relationship with merchants. We have been talking a lot about the Durbin Amendment to the Dodd-Frank, and which wants to cap debit card swipe fees charged to merchants. Where are you guys on this?

NELMS: Well, I am not in favor of price caps. I am in favor of competition being the answer and we - one of the things Discover owns is Pulse, which is one of the largest debit networks. I have 4,500 banks and financial institutions who issue on that network. So we are concerned for our bank customers.

I hope that we will end up with the right balance of things over time. In the meantime we are very focused on using this as an opportunity to provide more competition so we don't need price controls.

MASSAR: If there are price controls what's going to happen then in the industry? What do you see? A lot of the banks are saying, well, we are going to charge our customers in other ways. How do you see that would potentially play out?

NELMS: Well, I am concerned because I think that the price controls proposed don't even cover all the cost and no business can operate below cost. And so you are starting to see some of the banks charge fees or have other ways to make up to cover their cost and ultimately their profits. So I -

MILLER: Hang on. You're saying the government would implement inefficient price controls?

NELMS: I generally -

MASSAR: Our sarcastic moment of the day.

MILLER: Surely that's not the case.

NELMS: Again, I think competition is the answer, not price controls. And -

MASSAR: Well, how would it make you do business differently if we had those price controls in place?

NELMS: Well, the part of the amendment, the proposal that affects us probably more directly is the requirement to have multiple competitive cards, networks on a card. So that's an opportunity for Pulse to be that second option on many cards.

So that's the biggest thing that we see. The other thing is we will certainly try to be as efficient as we can for all our banks to try to make this great business continue to prosper.

MASSAR: Five seconds, when all is said and done do you think it will get through?

NELMS: I think there is a reasonable chance that it could be, at a minimum, delayed. I think there has been a lot of concern. It never had hearings. I think the more things come out the more people realize this is a complicated and very important issue.

MASSAR: Right.

NELMS: It affects almost everyone in America. We need to make sure we get it right.

MASSAR: All right, David, good getting some time with you. Thank you so much, -

NELMS: Great being here.

MASSAR: - David Nelms, CEO of Discover Financial Services.

NELMS: Thank you both.

15:11

***END OF TRANSCRIPT***

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