The bank credit card's consistently favorable profit margins are not blurring industry leaders' focus on outside competition.

They see the Discover card, for example, beginning a new life as a spinoff of Sears, Roebuck and Co. Meanwhile, American Express Co., even in the midst of an effort to cut expenses by $1 billion, is investing more in its core card business.

Harvey Golub, the new chairman of American Express "appears to be a real street fighter," said Bradford W. Morgan, executive vice president for marketing at Visa U.S.A. "Don't write them off."

But Mr. Morgan views Discover as "the biggest threat we face."

The Dean Witter Discover & Co. product continues to gain market share and is doing what it can to stay a step ahead of the banks, Mr. Morgan and other bank card experts say.

The Discover Card, which introduced the idea of cardholder rebates in the mid-1980s, recently lowered its interest rates to levels competitive with bank cards that offer rebates of their own.

Tiered Rates

In addition, Discover has addressed what some considered a weakness in its product by tiering its rates to encourage greater use of the cards.

Discover also has been successful in building its number of card-accepting merchants by charging lower fees than banks.

To be sure, Visa and its bank card rival, MasterCard International, still snipe at each other. Mr. Morgan and MasterCard's U.S. regional president, Peter S.P. Dimsey, engaged in some verbal one-on-one combat earlier this month at the American Bankers Association Card Management Workshop.

External Threat

But each saved a volley or two for what they view as the external threat.

Mr. Dimsey pointed to a 4.9% decline in the number of Discover cards last year as evidence that the program is experiencing problems.

But he also acknowledged a recent Dean Witter, Discover regulatory filing that indicated that Discover remained the fastest growing card in 1992 with a 26.1% increase in charge volume.

MasterCard was second, with 13.5% growth, and Visa third, with 10.9%, Mr. Dimsey said.

One reason for bankers' enmity toward Discover is the still unresolved court battle in which the Sears offshoot is trying to gain membership in the Visa system.

Bankers resist letting a competitor share the brand identity infrastructure they have built over a quarter of a century, Discover claims it merely wants to offer a new Visa product and will not subsume its existing program.

The warnings about Discover's potential even without a Visa franchise were underscored, however, in research by Auriemma Consulting Group, Westbury, N.Y. The firm asked 1,500 cardholders to identify their most valued card, and Discovered came out on top, said Joseph Powell, who conducted the research.

Impact of Rebates

The result was somewhat skewed by the fact that more consumers hold a Discover card than any single bank's card, but there was an overriding, reason for the preference: the rebate.

The implication, Mr. Powell said, is that banks may be able to attract cardholders by lowering their rates, but they also need to offer a rebate or incentive to get the consumers to run up balances.

Discover's rebate of up to 1% of purchases is actually smaller than the 5% that can be applied to car purchases by holders of Household International's General Motors Card or Citibank's Ford card. But "consumers like the immediacy" of receiving an annual rebate check, said Anne Morgan Moore, president of Synergistics, Research Corp. in Atlanta.

Although Discover's merchant base remains relatively small at 1.7 million, compared with about 10.5 million worldwide each for MasterCard and Visa, it is growing rapidly due to its favorable rates.

Discover is charging merchants about 1% of every transaction, compared to an average of around 2% charged by banks and 3% or more by American Express, said William Westervelt, principal in First Annapolis Consulting, which specializes in merchant processing.

Partly due to its lower rates, Discover remains the only card accepted in discount warehouse stores. Pace, a warehouse unit of K mart Corp., recently decided against accepting bank cards following a brief pilot with MasterCard.

As for American Express, Mr. Morgan said the travel and entertainment giant appears to be responding to Visa's "everywhere you want to be" campaign with some effective advertising of its own.

After an aggressive campaign that started last fall, for example, American Express regained its image with consumers as the preeminent travel and entertainment card, wiping out gains Visa had made with its sponsorship of the Olympic Games, Mr. Morgan said.

Two Initiatives

As if to emphasize that it is still a vital force, American Express unveiled two initiatives that pose a direct challenge to banks.

One is "Optima Rewards," a program designed to encourage customer loyalty among its Optima cardholders. The other is a series of discounts for elderly cardmembers, in hopes that long-time users would stay with the card in retirement.

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