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Hate Your Credit Card Company? 1 Just Gladly Gave Its Customers Nearly $200 Million

By Patrick Morris - Dec 28, 2014 at 8:10PM

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Talk about rewarding customers: Discover recently took a $200 million hit so its cardholders would have better benefits.

Hate your credit card company? Imagine if I told you one just took a nearly $200 million hit to its bottom line so its customers could get better cash-back benefits.

Sound too good to be true? It isn't. Discover Financial Services (DFS 1.00%) did just that in November.

Source: The Motley Fool.

The decision
In a press release on Nov. 19, Discover announced that it would make it even easier for customers to redeem their cash-back rewards.

It declared that customers could "redeem rewards for any amount, anytime" and that the rewards they earned on their cards would never expire. In addition, Discover decided that "rather than have rewards forfeited at account closure or for inactivity, we'll credit the cardmember's account with their Cashback Bonus balance."

"We know our customers want the most rewards possible, but equally important is their ability to use them when they want," said Discover's vice president of rewards, Heather Roche, in the announcement. "We are excited to give our cardmembers more redemption flexibility."

While all that sounds fine and dandy, Americans are well aware that when companies declare they'll be making moves to the benefit of customers, there's often an ulterior motive that ends up hurting those same customers.

For example, M&T Bank (MTB 1.58%) advertised offered a "no strings attached," free checking account that actually would charge a monthly maintenance fee between $5 and $14 if the account was inactive for 90 days.

As a result, the Consumer Financial Protection Bureau, or CFPB, deemed the move as "unfair, deceptive, or abusive" and required M&T to refund $3 million to nearly 60,000 of its customers.

But in this case, Discover did just the opposite. A subsequent SEC filing revealed that Discover will be bearing the burden, and it will take a $178 million charge to its bottom line as a result of the move.

The reason behind the decision
So why did the company decide to make such a move?

Discover's two top executives, CEO David Nelms and CFO Mark Graf, revealed at the Goldman Sachs Financial Conference that the rationale was simply that the company chose to deliver on its brand promise: "We treat you like you'd treat you."

In addition, Nelms went on to say the benefit will also come to its investors, because the company believes that "these changes will help drive loan growth [and] new accounts and potentially be a sustainable competitive advantage." 

The impact to investors
It's no secret I think very highly of Discover, and frankly, this decision only further reinforces my opinion that it's a great company for investors and customers to consider. I'm an investor and customer myself.

Through the first nine months of the year, Discover had $3.1 billion in pre-tax income, so if we assume it will make roughly $3.6 billion for the full year, the $178 million charge will be a 5% hit to its bottom line. While that's by no means disastrous, it is certainly material.

However, when you look beyond the financial aspect and consider the broader picture, the words of Warren Buffett come to mind:

If we are delighting customers, eliminating unnecessary costs, and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.

Moves like this show that Discover is clearly making an effort to be the outlier in the banking industry that does all in its power to treat its customers with dignity and respect. And that will ultimately delight its investors as well.

Patrick Morris owns shares of Apple, Bank of America, and Discover Financial Services. The Motley Fool owns shares of Apple, Bank of America, and Discover Financial Services and recommends Apple and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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M&T Bank Corporation Stock Quote
M&T Bank Corporation
MTB
$189.82 (1.58%) $2.95
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Discover Financial Services
DFS
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