Discover Financial Services said it is pursuing more deals like the one it just struck with Allstate Corp. to expand its direct banking business.
Discover is buying almost all of the home and automobile insurer's banking deposits, which were $1.1 billion as of Sept. 30. Discover, which announced the deal Tuesday, said it would have a marketing relationship with Allstate.
"We're really trying to kind of expand beyond the card," Steve Olszewski, the credit card network's vice president of deposit products, said in an interview Tuesday.
Discover had deposits of $20.6 billion from its direct banking operation as of November, up from $3 billion in 2007. That put it among the top five direct banks in the country, Olszewski said.
"We continue to look for partnerships with marquee names," Olszewski said. "We actually are in active discussions with three different partners at the moment and hope to be at a point to be able to announce the launch of similar programs" in the near future.
Olszewski would not name the other potential partners.
Under the multiyear partnership, Allstate's agents will market online savings, certificates of deposit and other deposit accounts to customers through Discover's Discover Bank subsidiary. Allstate, which has offered similar products since 2001 through its Allstate Bank unit, does not plan to sell such services after the deal closes. (It is expected to close in the first half of this year; Discover said the financial terms are immaterial.)
"Allstate's decision to kind of leave the banking business was a wonderful opportunity for us to open up a marketing relationship," Olszewski said.
An Allstate spokeswoman said Tuesday that new banking regulations were a factor in the company's decision, but the desire to focus on products and services that are "core" to its insurance business was the main driver.
"Affinity" relationships like the one with Allstate have become a bigger part of Discover's efforts to expand its retail banking operations in recent years.
In January 2008, Discover Bank started a marketing partnership with AAA (formerly the American Automobile Association) and in May 2010 it struck a deal with the American Association of Individual Investors.
The partnership with AAA has resulted in more than $2 billion in deposits, Discover said last year. It has not said what the result has been from the investor association deal.
Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods Inc. in New York, said Discover's strategy makes sense, especially in light of the challenges of using securitization as a funding vehicle for its credit card loans.
Recent accounting requirement changes as well as economic issues have made receivables securitization a less attractive funding option for lenders.
"It's very clear that deposits are probably going to be a key part of their strategy for all of the card industry," Sakhrani said.
Olszewski acknowledged the purchase of Allstate's deposit accounts "certainly helps us from a funding standpoint" but said business diversification is a bigger driver.
In keeping with that strategy, Discover has made other acquisitions recently. In December it closed its $600 million purchase of Student Loan Corp., which was majority owned by Citigroup Inc. It gained $4.2 billion of SLC's private student loans and $3.4 billion of its asset-backed securitization funding.
Discover, which is based in Riverwoods, Ill., and Allstate, of Northbrook, Ill., both have ties to the retailer Sears Holdings Corp. Both were owned at one time by Sears, Roebuck and Co., which spun them off in the early 1990s. Discover was later bought by Morgan Stanley, which spun it off in 2007.
