Discover Financial Services (DFS) on Wednesday rolled out its long-anticipated checking account, a key step in the company's bid to compete with more established online banks.
Initially, the Riverwoods, Ill., company is offering checking accounts only to a limited number of its existing customers, but a larger roll-out is planned for next year.
Discover is marketing the accounts as "Cashback Checking," with customers eligible to receive 10 cents back for each debit card purchase, each online bill payment and each check they write.
The 10-cents-back rewards program gives Discover a specific perk to tout as it seeks to compete with direct banking rivals including Ally Financial and Capital One 360, which was formerly ING Direct.
"It needed to be simple and clear so that customers could see value," explains Roger Hochschild, Discover's president and chief operating officer.
The accounts do not carry monthly fees or require a minimum balance, according to the company. Checks are free, as are cash withdrawals at a nationwide network of 415,000 ATMs. Checking customers will be able to access their accounts through Discover's existing mobile app, both to make deposits and pay their bills.
The online checking account, which for now is available to existing Discover customers by invitation only, is designed to appeal initially to early adopters of new technology, as well as to households with more than one checking account.
But given the rapid proliferation of mobile devices, and the higher expenses associated with operating branches, Discover sees online banking as the industry's future.
"Clearly our goal is to be the leading direct bank," Hochschild says.
The checking accounts are a natural extension for Discover, which already offers home loans, student loans, personal loans, certificates of deposit, money market accounts, savings accounts and, of course, credit cards.
Checking accounts provide Discover the opportunity to tie together its existing consumer financial products, says Brian Riley, senior research director of cards and retail banking at CEB TowerGroup.
With the new product's launch, Discover could also start competing with prepaid card providers such as American Express (AXP), which sells its Bluebird cards in Walmart stores, Riley adds.
Discover first announced plans for a checking account in the fall of 2011 and initially planned to launch it at the end of 2012, though it later delayed the product's introduction.
Back in 2011, the company cited the shifting landscape for debit card swipe fees as one reason it was waiting to unveil the checking account. Discover Bank, which has $71.8 billion in assets, is subject to the price caps on debit swipe fees.
Company officials have said that as their checking product becomes available to more customers, they expect it to provide Discover with a stable, low-cost source of funding.
Discover's strategy of using rewards to entice early adopters has worked well for others, says Jim Van Dyke, the chief executive and founder of Javelin Strategy & Research, a division of Greenwich Associates.
"Rewards can be great at driving sales," Van Dyke said in an email.
He adds that Discover, which will process debit transactions on its low-cost PULSE payment network, might do well to tie the accounts to specific deals and offers.
Discover is the latest entrant in an increasingly crowded field of companies that offer branchless banking to customers disenchanted with more traditional means of managing their cash.
There are larger competitors such as Ally Bank and Capital One (COF). And there are startups such as Simple (formerly BankSimple) and Moven that offer checking accounts through smartphone apps.
But the market for branchless banking is still a narrow one, according to Rakesh Agrawal, a consultant on mobile payments and marketing.
"I think for the typical consumer, they are not really addressing a need," Agrawal says. "One of the biggest challenges of getting people into alternative banking products is marketing and distribution. And there is a reason that, in many areas, there is a bank on every corner."