As valuations for startups shrink and some restructure, established payments companies such as Discover Financial Services may benefit from expanding opportunities to lure talent.
When asked last week at the Morgan Stanley U.S. Financials, Payments and CRE Conference if the pull-back in fintech valuations creates opportunity for the card company, Discover CFO John Greene said it does, and suggested it may aid the company in recruiting.
In the recent past, Riverwoods, Illinois-based Discover noticed “a lot of people with tech skills ended up leaving [Discover] to go to fintech players,” but those employees found “the currency wasn’t worth what they thought it would be worth,” Greene said on June 15. Greene didn’t specify what currency he was referring to.
Hiring and retention have been a top challenge for payments firms, where massive amounts of capital flowing into the space have fueled frenetic growth. But as startups and public companies alike now face macro-economic headwinds such as inflation, formerly sky-high valuations are falling. Companies like PayPal, Klarna and Bolt have cut employees.
Given what’s occurring, the chance to bring in talented workers “will become more and more prevalent,” Greene said. It will also eventually help “reduce the amount of turnover that we’ve seen on the technology front across the industry for established players.”
In March, Andy Eichfeld, Discover’s chief human resources and administrative officer, told Payments Dive the company had experienced higher attrition than it had in the past. Discover has worked to counter that by touting its culture and value proposition for employees, he said. In segments like engineering, analytics, digital marketing and recruiting, Eichfeld said Discover has reviewed its approach, examining pay and considering contract work.
Greene also expects the market shift will present acquisition opportunities, but he suggested the company will be patient in seeking additions. “We’re going to continue to be selective and make sure that it meets the criteria that we typically have thought about,” he said.
Those criteria include: “Will it help strengthen the Discover franchise? Will it perhaps add a revenue stream to Discover? And then, third, is there upside in terms of if we have a minority stake in the future, as a result of share price appreciation?” Greene said.
With those considerations in mind, “I think there will be growing opportunity, but the valuation piece will be the thing that we’re going to spend some time [on] and see how it shakes out,” Greene said.
With respect to spending and credit quality this quarter, Greene said credit metrics continue to be better than what Discover expected coming into the year. According to a recent Discover regulatory filing on June 14, charge-offs have been just over 2%, “which is a very slow pace of normalization,” Greene said. The delinquency rate, as of May 31, was 1.71%, the filing said.
Despite inflation, the consumer “remains incredibly strong,” Greene contended. He pointed to a robust labor market. “The number one factor that’s correlated to losses historically across consumer finance is jobs,” he said.
To tamp down inflation, the Federal Reserve last week raised its benchmark interest rate by 75 basis points. The Fed’s efforts, such as quantitative tightening and rate hikes, “typically aren’t correlated to losses for us,” Greene said.
That’s mainly because Discover targets “a prime revolver customer segment” – referring to cardholders who tend to carry a balance each month. For that clientele, “there’s plenty of daylight between making their payments and having payment shock as a result of interest rate increases,” he said.
“We’re very sound from that standpoint,” Greene said. “I look at the balance of this year and into next year in a generally very favorable light.”
But for smaller fintech rivals on the ropes, Greene has a more pessimistic attitude. “I personally don’t think valuations have bottomed out yet,” he said.