Discover Unveils Credit Card Aimed at Riskier Borrowers
Discover Financial Services is making an aggressive new bid for consumers who can't qualify for a traditional credit card.
On Sunday, the Riverwoods, Ill., company began marketing a card that requires a security deposit but carries many of the perks normally associated with the more upscale prime segment.
Though the card will likely appeal to a limited pool of potential borrowers – applicants are required to deposit at least $200 in order to open an account – it offers a new way for the $86 billion-asset Discover to build its loan portfolio.
Following a new blueprint, card issuers are seeing returns on assets above 4% for the first time since before the financial crisis. How long the good times last will depend partly on how well the U.S. economy weathers turmoil in China and other markets.January 11
Profits at Discover Financial Services fell for the fourth consecutive quarter amid higher compliance expenses and rising funding costs.October 20
The product also seems likely to be viewed favorably by regulators, since it should allow certain consumers to build their credit profiles, while simultaneously providing them a more affordable alternative to high-cost payday loans.
That is not to say that the Discover card offers cheap credit. Annual percentage rates on purchases made with the card are 23.24%. For cash advances, the APR is 25.24%.
But unlike a competing product from Capital One Financial, the Discover It Secured Card offers cash rewards of 1% to 2%. And in contrast with a secured card from Citigroup, the Discover offering does not carry an annual fee.
In addition, users of Discover's secured card will have free access to their credit scores, a feature that Discover has been offering to customers since late 2013.
"It's going to be differentiating in the market, because most of the competitors that offer secured cards have annual fees, and are offering watered-down versions of their products. And we're not doing that," said Jerry Young, a Discover marketing executive.
For roughly two years, Discover has quietly been offering the secured card to certain customers who get turned down for the company's other credit cards. But now it is making the product available widely.
The rollout comes six months after Discover Chief Executive Officer David Nelms said that his firm was ready to start offering plastic to higher-risk borrowers.
"I do think there is some opportunity to take a little more risk to get a little more growth to increase profitability," Nelms said during the company's July 2015 earnings call.
Discover insists – and has since July – that it is not getting into the subprime credit card business. But at other large credit card companies, secured cards have often been used as a way to build subprime portfolios.
Typically, customers who make timely payments on those secured cards eventually receive an offer for an unsecured card. Those unsecured cards often carry interest rates that are higher than what are available to prime customers, but lower than the rates previously offered on the secured card.
Discover is following a similar strategy, whether or not its secured card customers are classified as subprime borrowers. After 12 months, Discover will review cardholders' accounts each month to see if they qualify for a card that does not require a security deposit.
"There is nothing the card member needs to do," Young said. "It's an automatic review, to see if they qualify to have their deposits returned."
Young said the secured card should appeal both to people who are looking to rebuild their credit histories as well as twentysomethings who have little or no experience with credit.
"This is part of our young-adult strategy, where we're looking to build long-term engagement and loyalty," he said.
Marla Blow, a former executive at Capital One, said that the mass appeal of secured credit cards is limited by the requirement that the customer put down money upfront.
"It's hard to get people to send you money," said Blow, who is now the CEO of FS Card, a recently launched subprime credit card issuer. "It's a high bar to clear."
Nicholas Clements, a former executive at Barclays and Citigroup, agreed, but he also said that the ability and willingness to put down a deposit is a signal that the borrower is a better risk than most other consumers with marred credit records.
"It's like training wheels on a credit card," said Clements, co-founder of the comparison-shopping site Magnify Money.