Discover Financial Services (DFS) has reported that it has spent $280,000 during the second quarter 2010 to address the issues related to credit card reforms. The lobbying charges nudged up from more than $220,000 in the first quarter of 2010 and $250,000 during the second quarter of 2009.
 
Discover lobbied the federal government on sweeping new legislation and also lobbied the Congress for certain issues such as interchange fees, the fees that merchants pay for credit and debit card transactions to be processed. In the April-to-June period, Discover also lobbied on tax issues.
 
The sweeping new legislation reform became a law in July 2010 to tighten the regulation on banks and capital markets following the 2008-09 financial meltdown. It has placed new fees and limits on Discover and other nation’s biggest credit card companies, changing the interest rate hike, charging over-the-limit fees and the banks’ requirements to apply payments to higher-rate balances. Apart from this, the law has imposed new restrictions on the $450 trillion derivatives market, and developed a new consumer-protection division for mortgage and credit-card products.
 
Besides Discover, its competitors Mastercard Incorporated (MA) spent $2.3 million and American Express Company (AXP) spent $630,000 in the second quarter to lobby the federal government on issues tied to the recently passed health care reform bill and other issues.
 
In the April-to-June period, MasterCard lobbied the Congress and the Federal Reserve about issues related to payment cards usage and about issues related to access to global markets, the Anti-Counterfeiting Trade Agreement and intellectual property enforcement.
 
On the other hand, Discover’s competitor American Express lobbied Congress, the office of the president, the Treasury Department, the Federal Reserve, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. and the Internal Revenue Service along with the U.S. Postal Service and Congress regarding laws related to Postal Service retiree health benefits.
 
The cards segment forms the key source of income for Discover and we expect the company to work on expanding the use of cards and gear up to maintain the credit performance improvements.
 
However, the regulations under the Credit Card Accountability Responsibility ad Disclosure Act (CARD Act) are expected to make credit cards costlier and their restrictions on finance charges and fees are expected to result in lower interest income and loan fee income.
 
The final provisions of the CARD Act came into effect on August 22 and are expected to have longer term repercussions on the card issuers. Though the new rules will protect credit card users from unreasonable late payment fees, interest rate hikes and other penalty fees, it could adversely impact the profitability of Discover and major card issuers. Discover had anticipated losing $80 million to $90 million of annual fee pretax income during the second quarter, taking into account the effects of the Act.
 
Currently, Discover carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.
 
AMER EXPRESS CO (AXP): Free Stock Analysis Report
 
DISCOVER FIN SV (DFS): Free Stock Analysis Report
 
MASTERCARD INC (MA): Free Stock Analysis Report
 
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