Sears, Roebuck and Co.'s Discover card unit, the only big credit card issuer that has clung to 19.8% interest rates, is about to relent.

Faced with a shrinking cardholder base and a potential marketing embarrassment, Discover will soon unveil a new pricing structure that will conform with those adopted by many of its lower-priced competitors, company officials hinted.

"The rate is 19.8% now, but that doesn't mean that won't be changing," said a spokeswoman for Dean Witter Financial Services Group, the Sears unit that administers the card. "We're always looking to change our pricing structures to better suit the needs of our customers."

Discover's 19.8% charge on revolving balances contrasts with an average rate of 18.22% on a market-share-weighted basing among all issuers, according to RAM Research Corp. of Frederick, Md. Moreover, many card issuers have dropped their rates in the past several months by more than 200 basis points for their best customers.

The contrast between those discounters and Discover is all the more disquieting for the Sears unit, because it has marketed the card since its inception in 1986 as the smart alternative for the value-conscious consumer.

While Discover's resistance to rate drops has been largely overlooked by politicians and consumer activists, there is some evidence that its cardholders have noticed.

Greenwood Trust Co., the Delaware-based bank that issues Discover for Dean Witter, saw its card-holder base drop by 300,000 in second-quarter 1992. At June 30, it had 41.1 million cardholders.

Discover "stands out dramatically against a lot of folks that have dropped down," said Bruce Brittain, an Atlanta-based researcher who has closely monitored the card's growth. "They would get a lot of publicity if they lowered their rates."

Competitors Set the Tempo

Discover's largest competitors have already taken steps to retain their most profitable cardholders through rate cuts. In April, the Citicorp unit unveiled a plan to slash interest rates on its standard card by as much as 3.9 percentage points to 15.9% for customers who pay their bills on time but revolve large amounts of debt.

Such peformance-based pricing structures, which are almost always pegged to the prime rate, have become a bank card industry norm. Just two weeks ago, Chase Manhattan Corp. announced that its best customers would soon pay 14.4% to revolve their balances.

Now, Discover is expected to roll out its own tiered pricing plan, basing the rates cardholders pay on spending habits and payment performance.

Discover, to be sure, has some characteristics that still distinguish it from competitors. Most notable is that it does not charge annual fees, a feature that Sears has vowed to continue.

Discover cardholders also enjoy interest-free cash advances and a cash-back bonus plan, under which cardholders receive rebates equal to 1% of their charges each year.

Sudden Shift in Growth Pattern

The Sears unit is not unique in seeing its growth flounder during the recession. But the stasis at Discover is noteworthy because in the last two years 'its growth far outpaced competing bank card brands.

"Their growth was very strong between 1990 and 1991," said John Donovan, an official at MasterCard International. "But in the second quarter of 1991 they lost cards."

That loss, combined with the second one in this year's second quarter, could hurt Discover's parent. During the first half of 1992, Dean Witter's credit services group, which includes Discover, earned $136.1 million. That is more than half of the $241.4 million earned by Dean Witter unit and more than one-sixth of giant retailer Sears' $667.6 million profit.

Moreover, Discover makes less from merchants who accept its card than do most rival issuers because it has courted them with lower fees. Restaurateurs, catalog merchants. and other retailers that take Discover generally pay less to Greenwood than they do to processors of Visa cards and Mastercards.

Flexing Marketing Muscle

Even as it moves to lower its basic card rate, Discover is putting more marketing muscle into its one product that does charge consumers annual fees.

The "Private Issue" card, Discover's version of a gold card, is being advertised vigorously in national magazines. Discover charges a $40 annual fee for the card.

"They are obviously spending some resources promoting that card," Mr. Brittain said.

Dean Witter does not disclose how many Private Issue cards it has sold. But Mr. Brittain estimated that in 1991 it was carried by 1.2 million consumers.

He also said Discover remains a strong competitor to Master-Card and Visa. Once it brings its rates in line with the big banks, its competitive prowess is expected to be that much larger.

[Big banks] continue to take Discover much more seriously than the smaller issuers do," Mr. Brittain said. "They spend on market research and they know what's going on."

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