Sears' Discover Card a Weakling No More

A blue-collar outsider has successfully invaded the gilded world of bank credit cards.

The intruder is Sears, Roebuck and Co.'s Discover card, once dismissed as an ill-conceived venture destined to go the way of the Edsel.

Today the Discover card has made Sears the second-largest issuer of bank credit cards and has become a major bane of bankers' existence.

Rivals Are Wary

"It is the competition to watch," said Keith Kendrick, senior vice president at MasterCard International. "Our membership has become quite aware of Discover over the past year and a half."

Little wonder. Most banks saw only 3% growth in their MasterCard and Visa portfolios in 1990 as the recession dampened consumer spending. But receivables at Discover expanded a whopping 35% to $11.7 billion.

And delinquencies grew no faster at Discover than at most card-issuing banks.

Discover's 37.7 million cardholders are vital to its struggling corporate parent, contributing almost one-fourth of earnings this year. In 1990, the card unit-which is part of Sears' Dean Winter Financial Services Group - added $117 million to the Chicago retailer's bottom line, or 13% of profits.

In the first nine months of 1991, Discover profits soared to $141.6 million, or 24% of the retailer's income

Early Skeptics

When the card was launched in 1986, rivals sneered that its proletarian audience of Sears department store cardholders would be bad risks and low-volume customers. More important, they doubted that merchants would want to go through the laborious process of setting up a payment system with Sears and doing extra paperwork.

Indeed, Discover's once measly merchant network was its biggest problem. But it appears to have been resolved through aggressive pricing and patience. At the end of the third quarter, 1.42 million merchants accepted Discover cards at their stores, restaurants, and hotels - about 100,000 more than accept the American Express card.

"They don't have to talk about their acceptance anymore," said Mr. Kendrick of MasterCard.

The bank card groups, in fact, helped Discover grow. At the behest of merchants in their own networks, Visa and MasterCard in 1989 offered the ability to handle Discover card transactions through existing bank card processors. That eliminated the need for store owners to install separate transaction terminals for Discover.

Visa officials conceded that they were "selling out to the enemy."

Some Play Down the Threat

Some diehard critics within the credit card industry continue to downplay the Discover threat. They contend that with a merchant network only half the size of MasterCard's and Visa's, the card will never be a serious contender for a piece of America's wallet.

They also say that banks are that they ware a serious contender before, they are going to be now," observed Bruce Brittain, an Atlanta-based researcher who has tracked the card's progress since its launch.

There is no question that Sears is hell-bent on supporting its plastic offspring. The company is "targeting every credit-worthy cardholder in the whole damn U.S. marketplace," said Thomas R. Butler, president of Discover Card Services Inc. "We are really going after the broad cross section of everyone."

The Discover card is well positioned to do that. While Visa, MasterCard, and American Express spent most of the 1980s cultivating image-conscious conspicuous spenders, Discover marketed itself then the way it largely does today: as a card for the value-conscious consumer.

"We want to be known in the cardmember's mind for three features - no annual fee, interest-free cash, and purchase rebates," Mr. Butler said. "There are a host of other features we could have put on our card, but we have chosen not to do that."

It's a strategy that appears to be playing well in the more cautious 1990s. It now has its imitators. MasterCard last year began marketing itself as the card for mainstream America.

Right Place, Right Time

"[Discover is] in the right place in the right market at the right time," said MasterCard's Mr. Kendrick.

Discover, according to the bank card executive, is especially adept at selling itself to households that own only one of the two big bank cards, MasterCard or Visa. Looking for another credit card, these consumers will often choose Discover because it appears to offer money-saving perks that MasterCard and Visa do not, he said.

The same cost-consciousness that lures consumers also has helped Discover expand its merchant network. The fees passed down to restaurateurs, cataloguers, and other retailers are generally lower than those charged by processors of Visa and MasterCard.

"It has allowed us to sign up many restaurants and direct marketers," Mr. Butler says.

Discover, of course, is not immune from outside pressure. William Adcock, chairman of Synergistics Research Corp., Atlanta, believes that Discover will soon be forced by consumers to lower its 19.8% finance charge. That would be a serious drain on the card's profits, since Discover has pledged to never charge an annual fee.

Card Groups Circle Wagons

There are also some bankers who believe they have tied Sear's hands by ensuring that Discover will never be able to link up with Visa or MasterCard. Without the huge merchant networks built by the card associations, they said, Discover will never reach its full potential.

The card associations passed bylaws prohibiting both Sears and American Express from joining when the two companies were rumored to be buying some credit-card-issuing banks. Indeed, Sears bought a Visa-issuing thrift, Mountain West Financial, from the government last year. It is now embroiled in a legal battle against Visa to retain the right to issue the bank cards.

Discover's Mr. Butler said the Mountain West issue is irrelevant to Discover, which is issued through Greenwood Trust Co., another unit of Sears. Any talk otherwise is "wishful thinking" among Discover's competitors, he said.

Mr. Butler called his company a self-chosen maverick. "Our success to be different rather chosen to be different rather than go along with what everyone else did," he said.

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