New Discover Cards Aimed At People Who Run Balances

As part of a new business strategy, Dean Witter, Discover & Co. is seeking more credit card customers who don't pay their bills in full each month.

Nine years into the popular Discover card program, known mainly for offering cash rebates on purchases, Dean Witter is setting out to diversify its portfolio.

The New York-based company announced its strategy last week. It involves a variety of products, each appealing to different types of credit card users.

Industry observers said it was simply a matter of time before Dean Witter delved more deeply into market segmentation, because its flagship card appeals to the mass market. Indeed, Thomas R. Butler, president of Discover Card Services, said this plan has been in the pipeline for several years.

"We are going into the market with our one-size-fits-all (card) and adding other products to that," Mr. Butler said.

The announcement comes at a time when Dean Witter is trying to overturn a federal appeals court decision that prevented it from joining the Visa association and issuing that credit card brand. Mr. Butler said the Discover strategy is unrelated to the court case, which Dean Witter is hoping to take to the Supreme Court.

Dean Witter said it will introduce two products this year: a credit card geared for consumers who want low interest rates rather than rewards; and a new version of the upscale Private Issue card. The latter has a higher cash rebate rate - 1.5% - than the standard Discover card, which returns up to 1%, and it has more benefits, all for a $40 annual fee.

The cards will be accepted throughout the Novus system, Dean Witter's designation for the network of merchants and automated teller machines that take Discover.

The Discover card has enjoyed healthy profits and growth for some time, but it has been growing more slowly than the banks that issue the Visa and MasterCard brands, as well as American Express, which has similarly embarked on a market segmentation strategy in its Optima revolving credit program.

"The vast majority of (Discover's) growth is behind them," said Michael J. Auriemma, president of Auriemma Consulting Group, Westbury, N.Y.

Though Dean Witter is the largest single issuer of credit cards, with 42.7 million in force, Discover cards have captured only 6% of total card spending. In contrast, Visa, MasterCard, and American Express account for 45%, 28%, and 19% of the market, respectively, according to The Nilson Report, an industry newsletter, based in Oxnard, Calif.

Dean Witter's other problem is that Discover appeals to people who don't carry a balance on their credit cards, which limits the company's ability to tap into the increasingly important interest portion of the credit card revenue stream.

"The Discover card is driven by transactions, by the convenience user," said Mr. Butler, who declined to disclose the features of the new products except to say that they will be aimed at credit card "revolvers."

The parallels between Dean Witter's goals and what American Express has said it will accomplish over the next few years are not lost on Mr. Butler. However, he sees distinct differences between the two strategies.

American Express has said it intends to launch between 10 and 15 credit cards, and Dean Witter is committing to only two new products, while hinting that others will follow.

Also, American Express has said it wants to use its familiar brand identity as leverage for bringing new products into the market. Dean Witter is counting on the Novus brand name, which appears on merchants' windows and doors and ATM terminals, to support its new products.

"How does American Express shake its upscale image to let these other products take on their own images?" asked Mr. Butler, who believes that American Express has a brand identity problem.

"American Express is locked into a more upscale card, because of its roots, whereas Dean Witter is getting a fresh start by using the Novus network," to promote its products, said Mr. Auriemma.

In the meantime, Dean Witter is seeking to overturn last year's decision by the U.S. Court of Appeals for the 10th Circuit in Denver that upheld a Visa bylaw that prevents the Discover issuer from entering the Visa program.

Donald I. Baker, a former assistant attorney general for antitrust who now runs his own law firm in Washington, said he does not believe Dean Witter's strategy announcement will affect its legal arguments.

"If their case rested entirely on one theory, I believe this announcement would make a difference," said Mr. Baker, who has followed the case closely. But Dean Witter has several arguments as to why they should win the appeal, he said.

"One theory claims that (gaining entry into Visa) is essential to those who want to compete in the card business," Mr. Baker said. "A second theory is based on the old-fashioned boycott, that a group of banks cannot choose not to deal with (Dean Witter)."

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