Discover Returns To its Roots

  As the company that introduced the cash rebate and no annual fee, Discover Financial Services has established a pedigree for unconventional thinking. In 2002, the Riverwoods, Ill.-based card unit of Morgan Stanley again demonstrated it is not afraid to shake up the status quo, having introduced its Discover 2Go Card and an overhaul its famed Cashback Bonus.
  The two moves provided Discover with a platform to burnish its image with cardholders and keep competitors from encroaching on its turf.
  "We did not want to wait for competition to come after us in a market segment we own," says Ashoke Dutt, executive vice president of marketing for Discover. "There is a lot of commoditization in the card business, which has led to little innovation in recent years. We wanted to move to strengthen our brand and take our products to the next level."
  Achieving that goal will be key as Discover and other issuers compete in a mature industry. Managed receivables totaled $51.1 billion in fiscal 2002 ended last Nov. 30, up 4% from a year earlier. Charge volume rose 4% to a record $97.3 billion, but chargeoffs rose 83 basis points to 6.19% of average managed receivables. Discover claims it is adding about 500,000 merchants annually and reports it had more than four million merchant and cash-access locations last year.
  Discover set the stage to take its brand to the next level with the introduction of Discover 2Go, a portable card that can be carried on a key chain and is contained in a distinctive teardrop-shaped box. Similar to the key-chain loyalty cards issued by grocery stores and Exxon Mobil Corp.'s Speedpass wand, the card has been a huge hit with cardholders. Discover says it has exceeded the projected number of 2Go cards in circulation by 70%.
  While intended to cause a buzz with cardholders by creating a point of differentiation from traditional credit cards, Discover is gearing up to make the card more potent. Plans are in the works to sign two merchant partners that will be allowed to print their respective logos on the 2Go card's container. The logos will feature a bar code that when swiped at those merchant's stores will enable cardholders to earn additional rewards. Details of the program are still under discussion.
  "The carrying case for 2Go is a powerful piece of real estate," says Dutt. "We thought about adding a chip but we don't want to take a leap into technology that will overwhelm the market."
  Discover realizes, however, that new products will enable it to only go so far. Marketing remains a critical element of success in the card business. By revamping its Cashback Bonus, Discover injected new life into its time-tested message, "It Pays to Discover."
  The new program is being positioned as aspirational, rather than the non-event Discover worried the rebate had become. Cardholders formerly received their rebates once a year by check. Now they can redeem rebates in $20 increments, which they can spend immediately, accumulate in a personal account for later use, or donate to charity. Cardholders also can double their rewards at 20 merchant partners, a feature previously available only to platinum card holders.
  Three more partners-Hertz, Samsonite Luggage and Sprint-were to be added in April.
  "The Cashback Bonus allows cardholders to build toward a goal, rather than quietly receive a check at the end of the year," explains Betty Schick, vice president of strategic marketing and development for Discover. "Cardholders have more control over how they use it."
  Meanwhile, Discover is attempting to expand its merchant base beyond the U.S. and a few tourist locations in Canada and the Caribbean. Discover this spring signed a deal with Citigroup Inc.'s Banamex banking subsidiary in Mexico to bring Discover acceptance to travel-and-entertainment merchants in Banamex's 20,000-location portfolio.
  Discover, already in Britain with a Morgan Stanley MasterCard, plans to enter another foreign market, most likely in Europe, by 2004, Dutt says.
  With a hot new product in 2Go and a sexier rewards program, Discover appears to be right on target.
  "Our overall aim has been to keep a good balance in terms of marketing and new products rather than hitting the market with a flurry, then pulling back," says Dutt. "We want to sustain the pay-off from our marketing investment."