Discover Financial Services' low-key strategy may win it more business from customers increasingly frustrated with other card companies.
As the economy tumbles, most issuers have cut credit lines, raised interest rates, discontinued products, and reduced reward programs, tarnishing their reputations in the eyes of affected and alienated consumers. To Discover, that trend offers an opening.
"A lot of our competitors have been doing very, almost erratic line management strategies, even with existing, active customers," said Harit Talwar, its new chief marketing officer and executive vice president of card programs. "Our steadiness in a marketplace where maybe not all the competitors all the time are being steady is going to help us stand out."
Mr. Talwar, a veteran of Citigroup Inc.'s card and retail banking businesses, ran Discover's network business for five years before the Riverwoods, Ill., company promoted him to chief marketing officer and executive vice president of card programs in December. In both of his new roles, his top priority is emphasizing a "consumer-friendly" strategy in the midst of issuer cutbacks. Discover is hoping the contrast helps win more business from its current cardholders.
Discover has used many of the same risk management tactics. Analysts say the difference is that its cutbacks have been more careful and targeted than the cuts at other companies. The company, occasionally cast as the low-frills issuer among its flashier rivals, is trying to translate that label into "consumer-friendly" and move its cards up to the top of holders' wallets.
"I think we have entered into the cycle in a better position than our competitors. We have shown that our credit performance, while deteriorating, is better positioned than our competitors," Mr. Talwar said. "We entered it steady and conservative. We remain steady and conservative, and we are very hopeful and desirous of wanting to emerge out of this even stronger."
(Discover's chargeoff rate of 5.5% in its fiscal fourth quarter, which ended Nov. 30, was lower than the loss rates at most major issuers, though the company reported a month ahead of the others. It has said that it expects chargeoffs "in the mid 6% range" this fiscal quarter. Last month most of the major issuers reported loss rates above that level.)
Michael Taiano, an analyst at Sandler O'Neill & Partners LP, agreed that Discover has "taken the tack of being more consumer-friendly and trying to hold off on aggressively repricing" its accounts. In terms of risk management efforts, it has "done them like everyone has, but to a lesser degree than some of their competitors."
Discover also tends to have less initial exposure than other issuers to its cardholders, so it has less to cut, he said. "They don't have, on average, very significant lines, so they're probably smaller than, for example, American Express."
Analysts said gaining much market share, especially from new customers, is a far-off goal for most issuers in the current retrenchment. Mr. Talwar said Discover's primary goal is gaining more business from current customers, rather than winning new ones. "As we help them spend smarter and manage debt better, we will want to be more primary with more" cardholders, he said.
Observers said that strategy could help Discover advance its reputation, and eventually its market share, in the "back to basics" economic environment.
"Nobody's going to confuse a Discover card with a high-end platinum card. Nobody's going to associate it with frivolous spending," said Philip J. Philliou, a partner at the consulting firm Philliou Selwanes Partners LLC.
Mr. Talwar said his current marketing strategy revolves around Discover's online tools for consumers, including a new "Spend Analyzer" it intends to promote in a national television campaign starting next week.
Discover has said it is implementing — and even "embracing" — the new card rules federal regulators finalized in December. The rules, which will take effect July 1, 2010, would ban certain practices, limit when card companies can raise interest rates, dictate payment allocation methods to benefit consumers, and curtail late fees.
Mr. Talwar said Discover was "already in compliance" with some of the regulations, like a requirement for a 21-day grace period, and that it expects to implement the ban on double-cycle billing by this summer. Some rules, like those for payment allocation, require "system changes" that will take more time.
After regulators finalized the rules, observers speculated that some issuers would try to reap a public-relations boost by moving quickly to implement the changes. Discover has not unveiled a way to alert consumers about its plan to start following some of the regulations early, though it said it "may communicate to consumers directly when the time is right."
Mr. Talwar said that for now a potential public-relations boost would be a secondary benefit, rather than part of the marketing strategy. "While this has some pressure on pricing and spreads, it also has some potential benefits on consumers wanting to focus more on the brands, the customer service, and the rewards, rather than mindless promotional rates," he said. "In general, I like to focus on actually delivering customer satisfaction and customer value, rather than scoring PR points — not that I have anything against PR points."
