During the recent hoopla over cobranded bank credit cards, Thomas R. Butler has felt a little left out.
Mr. Butler is president and chief operating officer of Discover Card Services Inc. of Riverwoods, Ill., a success story that seems old hat next to the seven million General Motors MasterCards issued in less than a year, or the 17 million AT&T Universal cards in three years.
Discover, launched in 1985 by Sears, Roebuck and Co., opened six million accounts its first year and five million the second, and has added two million to three million each year since.
Mr. Butler contends that Discover's story is even more compelling, because it started from scratch, without the brand-name power or ready-made merchant base - with the exception of Sears' 800-plus stores - that a cobranded MasterCard or Visa product has.
"We are both the association and the individual participant," Mr. Butler said in a recent interview. "We were the last guy to come to the market, and have had to be very competitive in the offering we brought to the consumer.
"I guess we had to wait until [the cobranded marketers] launched to find out how much of a success we were," Mr. Butler said with a hint of sarcasm.
Top of the Heap
As of Sept. 30, Discover reported 27.9 million accounts, 1.83 million merchants, and 50,000 cash-dispensing network locations.
The Discover card ranks first in U.S. credit card accounts, ahead of Citicorp's 20 million, and second in managed receivables, at $16 billion compared with Citicorp's $36 billion.
The number of Discover cardholders - 38.9 million at the end of September - is down by 300,000 from yearend 1992, because of the purging of inactive accounts.
"We've built our business to the size it is today on the card business and on the merchant side," Mr. Butler said. "And we continue to add to those numbers. Any way you twist and turn it, I think we've been successful."
What's more, Salomon Brothers analyst Samuel G. Liss predicts Discover will rack up profits of $325 million for 1993, 57% more than last year.
The company's credit services unit returned 16.3% on equity in 1992, certainly respectable by banking industry standards. Mr. Liss estimated the return on equity win rise to 18.7% for 1993 and around 19% in 1994 and 1995.
Mr. Liss said Dean Witter's stock has outperformed market indexes since the shares opened for trading at $32 in February. The price been around $38, down from the 52-week high of $46.50 and up from the low of $30.625.
Mr. Butler has led the credit card arm of Dean Witter Discover & Co. since October 1986, when he took over from Raymond A. Kennedy.
Until that time he was senior vice president of operations, responsible for card member services, collections, security, payment processing, merchant security, and information technology.
The areas he didn't manage until taking the top job were marketing, account acquisition. and merchant sales.
Marketing Veteran
Mr. Butler joined Sears in 1969. After various merchandising and buying positions, he was named catalog marketing manager in 1977. He was a senior buyer from 1979 to 1981.
Over the next four years, Mr. Butler served as director of new ventures, director of corporate planning, and director of credit enterprises. Then he joined the nascent Discover unit.
Sears spun off its financial units this year as Dean Witter Discover. The Discover part of the family includes SPS Transaction Services, a point of sale transaction processor; and Novus, a consumer finance company.
Dean Witter Reynolds, the securities brokerage, is the other side of the financial services company.
Discover Card Services has considerable autonomy within Dean Witter's corporate structure - so much so that it has free rein to compete with the new Prime Option MasterCard, a cobranded card venture of Dean Witter Reynolds and NationsBank Corp. of Charlotte, N.C.
Contrasting Views
At the Prime Option launch announcement in November, Dean Witter's chairman, Philip J. Purcell, said there would be little overlap between Prime Option and Discover.
People are attracted to the Discover card because it is a no-fee, cash-back bonus" offering, he said; Prime Option will be aimed at consumers looking for a low-rate card with no annual fee.
Mr. Butler takes a different view.
"We see any Visa or MasterCard as competition," he said. "Therefore, we view Prime Option as competition."
Since Dean Witter got its independence from Sears, Discover has tried to create its own identity. A small part of that involves replacing the words "Sears Financial Network," which was a common theme in Sears' financial advertising, with "Novus."
The green-and-white Novus symbol appears on Discover signs, advertisements, direct mail, and statements.
Mr. Butler describes Novus as "a loose affiliation of activities that relate to financial services."
Cash-Back Bonus
The Discover Card is issued by Greenwood Trust Co. in Wilmington, Del. In addition to having no annual fee, Discover is the only issuer to push a straight cash-back bonus - up to 1% a year, depending on the annual total of purchases.
Discover says $355 million has been earned in the bonus program since 1986.
"I think there's still a strong affinity to cash," Mr. Butler said, because Discover cardholders are not locked into a single type of benefit, like cars or airline mileage.
In January, after many other credit card issuers had lowered their prices, Discover introduced a three-tier variable-rate structure called SmartRate.
The standard rate is 19.8%, but cardholders can qualify for 16.9% by making $500 to $999 of purchases or 14.9% by spending at least $ 1,000 with the card.
"Obviously, the decision we made was to cut our price," Mr. Butler said. "We decided to pass on to the consumer the impact of the lower-rate environment we're in."
In a November report, Mr. Liss, the Salomon analyst, said Discover's portfolio has lower average balances per active account than Visa or MasterCard industry averages.
Receivables growth has been solid, charge volume has exceeded industry benchmarks, and fees have grown, Mr. Liss reported.
He added that the fourth quarter is an important time for Discover - it is when the company posts much of its net annual receivables growth.
For that reason, Discover launched a $5 million holiday sweepstakes to reward cardholders and merchants and to boost charge volume.
"We're not a travel and entertainment-oriented card," Mr. Butler explained. "Retail is a very big part of our business. We felt we wanted to do something different."
Adding Merchants
This year, while the former parent, Sears, was opening up to MasterCard and Visa for the first time, Discover added J.C. Penney, Lord & Taylor, L.L. Bean and Lands End to its merchant base. Mr. Liss estimates Discover offers its merchants interchange fees that are 30 to 50 basis points below those on Visa and MasterCard transactions.
The pricing tactic may lead to some irritation from bankers, but not necessarily on the merchant side, said William Westervelt, a principal with First Annapolis Consulting in Maryland.
"All roads lead to the consumer, to whatever the consumer wants to use," Mr. Westervelt said. "In a lot of ways, the merchant doesn't care what card is used."
Discover's merchant locations are growing by 200,000 a year.
"Our view is we are making good and steady progress on signing merchants," Mr. Butler said. "I feel that we will be every place you can reasonably use a credit card. It's just a matter of time."
