How Discover Won Over The U.S. Middle Class

How Discover Won Over The U.S. Middle Class


Credit cards are a
trillion dollar industry. In 2018, they were swiped nearly
45 billion times, paying for products and services worth just
under four trillion dollars. Americans owe around one point one
trillion dollars in credit card debt, about five thousand
seven hundred dollars each. The US consumer is
doing very, very well. Strong consumer sentiment, strong
retail spending, very low unemployment. All of those things are
great for the credit card industry. Giants like MasterCard, Visa
and Amex dominate the network market. Chase, Citi, Amex and Capital
One are the biggest issuers. A quiet but a steady and
perhaps lesser talked about competitor is Discover. We’re not one of the
companies that’s always out there talking about how great we are. The number one performing stock of all
financials in the S&P for a 10 year period is not
just an average company. Discover has the 10th largest credit
card portfolio in the world, despite a smaller footprint
outside of the U.S.. Still, there are 57 million
Discover cards out there. It’s not really for the kind of
people that want to fly first class to the Maldives. Discover really is
kind of for the masses. When you think about the average
consumer and likely where they borrow and what their FICO scores
are, I think that they’re right smack in the middle
of all these issuers. The Discover credit cards
topped the J.D. Power Customer Satisfaction
Survey in 2019. So how did they win
over the American middle class? To understand the credit card industry,
it’s important to know the difference between a credit card
network and an issuer. The network is basically the digital
rails on which transactions are processed. A card issuer is the
company who actually takes on the credit risk. Discover and American Express
are both an issuer and a network. That gives them some
diversity in their business model. It also gives them a really stable
source of revenue, at least from the processing side. Very different from the credit side
of the equation where that could be a lot more profitable if they’re
charging you 18, 20, 25 percent interest. But there’s
also risk there. And it’s also less predictable in
terms of the transactors and the revolvers. You know, people who are
paying their bills in full or people who carry debt
from month to month. Forty percent of
Americans are transactors. 60 percent carry debt
from month to month. We spoke with Discover CEO
Roger Hochschild over the phone. Our model is lend focused. We’re looking for people and we make
most of our money from people who borrow money. American Express’ model
is much more spend focused. For issuers American
Express and J.P. Morgan Chase interchange the top two
slots on purchase volume and outstanding debt. Citibank, Bank of America and Capital One
fill up slots 3 to 5. Discover is sixth. The Discover credit card was launched
in 1986 by Sears Roebuck, the largest retailer at the time. Back then it was part of Dean
Witter, which was part of Sears, and they launched during
Super Bowl Twenty. They had this commercial back
in early nineteen eighty six. They talked about the dawn of
Discover and they really pioneered two main categories cashback and
no annual fee. Sears wanted to expand into financial
services and decided to accept only this year’s Discover
card at its stores. Many merchants actually viewed them as
a threat and they thought that accepting a Discover card meant they
were helping their rival Sears. So that actually really led to a
lot of hesitation and difficulty for Discover establishing itself. In 1993, Dean Witter Discovering
Company became a publicly traded company when it spun
off from Sears. Sears eventually filed for
bankruptcy in 2018. But that’s another story. In 1997, Dean Witter Discovering
company merged with Morgan Stanley. The mid 2000s were eventful for
Discover and the barrier to entry didn’t end at Sears front door. MasterCard and Visa were established
in the industry and Discover wanted in. In 2004, the Supreme
Court upheld a ruling in Discover’s favor. Discover claimed that MasterCard
and Visa had harmed its business by preventing their member
banks from issuing credit cards from the Discover Network. They did everything they could,
including reaching out to merchants to tell them that taking
Discover would help S ears. After the Supreme Court ruling
Discover’s business started taking off. G Consumer Finance Wal-Mart and
Sam’s Club became card clients and pulls a debit card network was
acquired with more than 50 million cardholders, the company had
become a major player. In July 2007, only six months
before the Great Recession, Discover severed ties with Morgan Stanley and
started trading on the New York Stock Exchange as DFS. We just set up or our
finance department our treasury function. Luckily, we had a heritage that goes
all the way back, the Sears are being conservative lenders. In the midst of the downturn
t he company received welcoming news. Visa and MasterCard paid Discover nearly
$3 billion in damages after finally settling the lawsuit. Discover strategy remains simple charge
no annual fee, offer simple rewards like cashback, conduct all
business online 24/7 u.s.-based customer service and acquire and keep
the customers who will revolve a balance every month. There is a relentless focus here at
Discover on a limited set of businesses. You compare us to most other
banks that are big in credit cards the’ve got commercial real estate
, they have small business lending. We’re focused
on consumers. That consumer is a prime borrower. 81 percent of Discover’s customers have
a FICO score of 660 and above. Competitors like American Express
caters to a more affluent customer base with a higher average
FICO score and Capital One serves subprime borrowers with an average
score below that of Discover’s customers. We might be more like
Toyota and American Express, maybe more like Mercedes. I would say the typical Discover
customer is probably a little bit more likely to be middle class or
even lower middle class, maybe more likely to be a parent, maybe more
likely to live in middle America. You know, we’re not necessarily
talking about the affluent urban professionals that are more likely to
gravitate to, let’s say, an Amex card or a chase card. According to the J.D. Power Customer Satisfaction Survey, Discover
has been voted number one every year since 2014,
except for in 2017. It’s very difficult in this stage of
the game in the United States in a very mature market to grow
your business because so many people already have a card. But it’s doing a really, really good
job of keeping the customers it has very satisfied with with
the value proposition that it’s offering. I think sometimes these airline
mile cards get a lot more attention because that’s just a
sexier kind of redemption, right? It’s first class airport lounge,
all that fancy stuff. The fact is, though, we found that
about two thirds of credit card rewards chasers prefer cashback. Discover’s balance sheet, reflects the
companies improving finances s ince the 2008 recession. The investors that are here looking
for, you know, high capital return, I mean, they’ve been roughly
around that 70 percent plus payout to investors through
dividends, share repurchases. And so it’s about
having a high R.O.T.C.E. Having a very stable
but growing business model,. Maybe it’s the Midwest heritage, we’re
not one of those companies, that’s always out there talking
about how great we are. And there are others who
do much more of that. But the last few years haven’t stocked
up for the Discover stock in a one year and a
five year comparison. It underperformed that of the
S&P 500 and multiple competitors. On January 24, 2020, a day
after the company’s earnings call the stock fell by 11 percent, the most
it had done in 10 years. It was announced that their share
of high risk customers, something called troubled debt restructurings, increased
by nearly 50 percent, something that has
worried investors. In an email to CNBC, the
Discover CEO Roger Hochschild said the market and individual stock prices can
be volatile from time to time. Our focus is on continuing to build
the long term value of the Discover franchise, which we believe will
be reflected in a stock’s valuation over time. Data show that younger generations
aren’t as enthused about credit cards, and though people as a whole
spend more and more on credit cards, revolving debt has declined nearly
every year in the past two decades, potentially hurting companies like
Discover, who depend on finance charges. If you want to continue to talk
to your shareholders and give them a successful story, you’re gonna have to
come up with something that’s going to look better than
just steady as it goes. It would not be surprising if in
time we see Discover either making an acquisition through merger with
another credit card issuer or being acquired by somebody bigger. In this day and age, it’s hard to
know what’s going to happen, but I would say, we have
a complete business model. We’re strong on both sides of the
balance sheet, if you think about our lending products, but
also our deposit products. So I feel very good
about how Discover’s positioned.

Author:

84 thoughts on “How Discover Won Over The U.S. Middle Class”

  • The best credit card that's on the market is the citi cash back card.. pay it off every month and it's 2% on everything..
    The second best card is the American Express Blue card .. 3% on all grocery stores..

  • Christopher Yiwei Liang says:

    I am a student and I have both a bank of America cash rewards (because I have a bank of America checking account) and a discover it card. I love both. No annual fees and cashback are the keys. Not everyone flies or needs fancy airline cards and not everyone wants to pay annual fees. Discover caters well to both those who pay off their bills every month and those who keep a revolving balance.

  • BonBonAdios MiaEVERGLOW says:

    I dont understand the difference between bank credit cards and Discover. Why do see banks and not Visa or Mastercard on those lists?

  • I see why I was approved for high credit limit when I apply during Christmas time. Because Discover expected me to make big purchases and then start paying them very high interest rates..😜😜😜

  • My daughter recently graduated from high school and is now in college but when it was summer I would always get envelopes from discover that wanted me to sign up but it always came with my daughters name like they wanted my daughter to switch to discover and thankfully I never did that and to date I still get envelopes trying to get me to sign up

  • Wynter-wainui Gross says:

    I pay in full, credit cards is what's wrong with this world, run by big corporations looking to bend you over and f*** you….. I'm still getting one though… 😅😂

  • I got a Fico score of 763 and got turned down by them. I currently have 4 cards and 2 of them offer the same deals as discover. No Annual fee, 15 months no interest on charges. Double cash back the first 12 months at 3% on certain categories. Yada Yada Yada. So I guess i have no idea why I'm watching because I guess i don't care about Discover lol.

  • Discover was my first credit card while in college. It was really the only student card/“beginner card” that offered any perks – cash back plus $20 every year for good grades all for no fees. Also, they had a thing where if you refer a friend you each got $50! Never experienced any negatives with Discover. Although I have sort of moved on to better cards now, I have to say I really appreciate them for building my credit and offering rewards for a newbie when most other companies didn’t.

  • New generation is using apps like Venmo and CASH App to pay for everything. They careless for airmiles or cashback. It's the APPS Mentality. It's all being attached to the web and being mobile friendly.

  • Nicholas Montoya says:

    Discover is also one of the few credit cards that waive your balance if it’s less than 1.99, “small balance credit” useful if you don’t spend anything you get that for free each month hehe.

  • Why I chose to be with Discover? When my credit was 670 and I only had a part time job due to bad streak of luck. All of the other credit card company like American Express, Citi and Amazon literally dropped me from their account because all I did was managed to pay off the interest and a bit of the payment. Fast forward…With all of the over account pretty much closed. Discover Card was the only who didn't give up on me! Now my credit is around 745….$9k limit with an annual spending around $4-7k on the card. Every other card issuer now are asking me to come back. No Thanks….I don't mind revolving my account from time to time as I have no issue paying off my purchase. Thank you Discover!

  • Discover closed my account without cause after I spent 26k/year (and always paid in full) it sucked because it was my first card and dropped my credit score by 40 points 🙁

  • Discover is truly a fantastic company that values its customer, and treats them with dignity. I am international in the US, and opened a savings acc w/ BoFA. A month into my acc, I asked BoFA for a credit card to start my score but they instead denied, and very condescendingly offered me a Secured Card, and the rep further told me that I might not get a CC because I’m new, and this is your only option. I applied to Discover, and received double the credit line, and am very happy with them now.

  • Have literally not had any credit cards in the last 20 years and have loved every minute of it. If you live within your means you'll never need another credit card the rest of your life. You couldn't pay me enough to get a credit card – its complete lunacy for people to feel the need to finance their purchases of all things useless. For the smart asses out there… No, I have not been in prison the last 20 years (or ever).

  • Credit card satisfaction..

    Everytime you swipe it doesn't decline? Lol

    Stay away from Credit Cards kids.. if you don't understand how the system works..

  • Love my two discover cards. First year 0% APR and cash back match. They gave me my highest limit, and have given me credit line increases multiple times. Even if you call in after your 0% APR expires you can usually get them to give you another 12 months if you say you’re planning a big purchase soon and couldn’t decide which card to use. Works every time. Lol

  • Im almost 40 and I learned years ago to not talk about credit cards with people. For some reason the idea of paying in full and therefore no interest doesn’t register in most people’s minds . Also, a lot people who bash credit cards cause they cause “debt” usually have students loans, mortgages, car debt out the ass but never bash that “debt”.

  • 90% items from Amazon are Made in China. They are much more cheaper, and a lot of them are working as good as US made in Products. Can you blame customers?

  • When everyone was giving me just $2500 line of credit with a 23% interest.
    Discover gave me $8500 with zero%
    I rolled the balance of the other cards around $2800 to Discover for free and 0% interest.
    I'm a supporter!

  • You are better off with a citi double cash card, 2% back on all purchases with no hassle. If you move all your normal purchases to it and don't keep a balance it's a great deal. I use an amex blue cash everyday card since I get 3% back on groceries up to 6k of spending per year. Also if you sign up for the amex card you get $200 back for 1k of spending in 3 months. No fees on either.

  • Discover for me it was started trip to how to use credit card I was start saving my money open my credit union account but discover was my first rewards credit cards I was start 700 dollars limit with secure deposit now I have a 8000 dollars limit on my 4 credit cards… if you have a discover credit cards that means you have money in the pocket discover such a great premium credit cards age around 20s to early 30s…

  • No annual fee….That's the trick. I'm NEVER going to pay an annual fee and if you do your a moron and part of the problem!

  • Mills Fortune says:

    I have a discover card and also took out an installment loan with them. They are absolutely amazing and have GREAT customer service and support. I gladly promote them and their seevices. They are great honestly

  • Never liked Discover card and has stopped using it, customer service is horrible. AMEX is much better – cash back is awesome and customer service is great.

  • Srh AutoSports says:

    customers pay for the great "freebies" because discover charges retailer up to 4% on each dollar they charge. and trust me the retailers add it to the customers bill.

  • Derp Derpington says:

    lol I paid my divorce lawyer with my Discover card. Also used it to pay for college to create a new career.

  • Ignore the greedy shareholders, what the world of finance needs right now is stability. Don’t go screwing up a good thing. Consumers first, thank you.

  • It doesn’t matter how many people already have cards. What matters is how many people don’t have cards. The middle class and the lower-middle class are deeply unbanked and don’t own any cards.

  • Skullkrane Entertainment says:

    So essentially even if every credit card transaction in one year was put towards the national debt, we'd still be well in debt.

  • Stuart Anderson says:

    I haven't had a credit card in 12 years. Everything is paid off. Building wealth is about having a pile of money, not your FICO score, friends.

  • I have discover and I'm happy with it because customer service is English speaking and American citizens I can actually understand unlike my other credit cards.

  • I have credit cards,… however i don't pay a dime in interest….you need to NOT carry over a balance… charge a small amount, less than 10% and be able to pay it off before your billing cycle.

  • Lalaine Gutierrez says:

    People are not building wealth by being in debt, they are building the wealth of these companies and their shareholders and CEOs. I only use credit cards for its 5% bonus cash backs and categories every season, nothing else. Pay off balance every month and charge only what you need to spend and not anything above that. Responsible financial transactions should be practiced by everyone looking to take control of their financial well being.

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