Credit Card Market in Transition: Discoveries at Discover Financial Services

The market for credit card services has gained significant momentum in recent years. With an average annual growth rate (CAGR) of 9.2%, the volume is projected by Business Research Company to rise from $478.09 billion in 2023 to $522.22 billion in 2024. This dynamic is expected to continue until 2028, with a forecasted growth rate of 8.3%, reaching a volume of $717.7 billion. Factors such as contactless payments, data security concerns, the emergence of cryptocurrencies, and personalized services contribute to this growth. The credit card industry is in a constant state of flux, adapting to customer preferences and economic fluctuations. According to the Quarterly Credit Industry Insights Report (CIIR) for the fourth quarter of 2023, the average credit card debt per borrower at the end of 2023 was $6,360, an increase of 10% year-over-year. This led to a total credit card debt in the U.S. of $1.13 trillion. Households in the 90th percentile owed an average of $11,210, with wealthier households tending to have higher debt. The use of credit cards is rising inexorably. TransUnion expects 167.2 million users by mid-2023, a significant increase compared to the last three years. According to the Federal Reserve Bank of San Francisco, credit cards accounted for 31% of all payments in 2022, while less than 10% of Americans typically used cash, as a Forbes Advisor survey in December 2023 indicated. However, default rates are also rising. By the end of 2023, they reached 3.1%, the highest level since 2011. Simultaneously, charge-offs in the second quarter of 2024 increased from 4.16% to 4.38%, a record high since Q4 2011. The average credit card interest rate in March 2024 was 27.89%, generating financial burdens for debtors. Digital payment methods are gaining importance in the future. A survey in August 2023 showed that more than half of customers prefer digital wallets over traditional cards. This suggests that credit card companies will continue to be innovation-driven, despite interest rate and debt issues. As mentioned in our article "7 Best American Bank Stocks to Buy According to Hedge Funds," the U.S. market for digital banking platforms was estimated at $1.04 billion in 2024 and is expected to grow to $2.04 billion by 2031 with a CAGR of 9.63%. Looking ahead, a mid-single-digit increase in credit card spending is expected until 2024, while balances may slightly decline following the massive surge since 2022. Provided the labor markets remain stable, credit metrics could normalize in 2024. Despite moderate inflation, the resumption of student loan repayments, high interest rates, and rising living costs remain central challenges. Based on our insights, we have compiled a list of the 10 best credit card stocks. U.S. bank Discover Financial Services (NYSE: DFS) is among them, operating in the segments of payment services and direct banking. The company shows remarkable resilience; net income grew impressively by 70% year-over-year in the second quarter of 2024 to $1.5 billion. Earlier in the year, Capital One announced it would acquire DFS for $35.3 billion. The deal is expected to be completed by the end of this year or early 2025. However, analysts remain skeptical about the deal, as the intensifying competition from Visa and MasterCard could have significant impacts. Following the Q2 report in 2024, Barclays announced a target price increase from $135 to $137 and rated the stock as 'Equal Weight.' In summary, Discover Financial Services ranks 8th on our list of the best credit card stocks. While DFS has potential, some AI stocks hold greater appeal for higher returns. For a detailed assessment, check out our report on the cheapest AI stock currently trading at less than five times its earnings.