Discover Credit Cards

In the early 1980’s, Sears, which was at the time the U.S.’s biggest retailer, looked to expand the company into financial services. They bought an investment firm, Dean Witter Reynolds, as well as a real estate company, Coldwell Banker, and started to think about expanding this further with the addition of a major credit card brand, aside from their retail store cards that they had been issuing for years.

Discover Credit CardsThe Sears retail credit card was of course only accepted at Sears locations, and while this had been pretty successful, Sears started to dream bigger, and wanted to take on the big guns of the credit card world, Visa, MasterCard, and American Express.

Credit cards are generally issued by financial institutions, not retail stores, even ones as large as Sears, so they went out and bought the Greenwood Trust Company, and now all the pieces were in place. In 1985, the Discover Card was launched, managed by the Sears Financial Network, which consisted of Discover together with Greenwood, which later became known as the Discover Bank.

Credit cards need a payment processor though, but that was put in place as well, and the Discover Card became a reality. Being issued by a retail store didn’t sit that well with Sears’ competitors though, as you might imagine, and Sears wasn’t shy about promoting their connection to the Discover card back then, even putting a logo of the Sears Tower on the cards, even though Discover was at the time officially part of Dean Witter Reynolds.

The Discover Credit Card Takes Off

Prior to the launch of the Discover Card, there had been several attempts to successfully create a major competitor to the big three major credit cards of Visa, MasterCard, and Amex, including one by Citibank called the Choice Card, which did make a good run at this over the period of a decade but ended up giving up the fight.

So if an institution the size of Citibank couldn’t pull this off, and keep in mind that in spite of the size of Citibank, one of the world’s largest companies, they were taking on several financial conglomerates in trying to break through in the major credit card business, how was Sears to do it?

Well Sears did learn quite a bit from the failed attempts of the Choice Card, which was nearing the end of its battle by the time that the Discover Credit Card hit the streets, and among these were the idea to shake up the industry by offering no annual fees and very generous cashback rewards.

The market was ripe for these changes and this was the reason why the Choice Card lived as long as it did, although it just didn’t gain the nationwide popularity that was needed to become enough of a force in the marketplace.

One of the things that plagued the Choice Card and other similar attempts was that they were launched in select markets only. Although this was the way that MasterCard and Visa got off the ground, starting in California than spreading throughout the world, that may have worked well at the dawn of the credit card era but the market was too saturated for that now.

The critical mass needed to drive both cardholder demands and in turn the willingness of merchants to accept the card, was much larger in the 1980s than in the past, but Discover had the means for a national launch, which was riskier but was really necessary to give them a fighting chance.

The Discover Card therefore hit the ground running, and their no fee, higher reward, and higher credit limit strategy, together with an aggressive marketing campaign, ended up building the kind of momentum that was needed to provide them with a good foothold in the market from the outset.

Discover Serves Up A Great Deal All Around

In spite of the early reluctance of some retail merchants to accept Discover Cards, the Discover Credit Card was set up to be very merchant friendly. Not only were the processing fees that they charged merchants lower than their competitors, they didn’t charge fees at all.

In spite of merchants not wanting to help out Sears’ finances, this proved to be very appealing to them, and each time someone used a Discover Card to make a purchase with them, they would save money. The bottom line is truly what matters in business, and money spoke once again in this case, leading to the Discover Card being widely accepted at merchants in the United States before too long.

No merchant fees and more cash back money doesn’t even seem to go together actually, as merchant fees provide the bulk of cash back rewards, usually the entire amount, but in this case Discover gambled that the interest they would earn on the borrowing would easily pay for these rewards.

This was a concept that had never even been considered, but the goal of the Discover Credit Card was to go one up on their competitors in every area, and they certainly put themselves in a great position to do that, all around.

In 1987, they got the exclusive contract with U.S. Customs Service, whereby anyone wanting to use a credit card to pay customs duty would have to obtain a Discover Card, because that was the only card they took.

They also had the exclusive card accepted at Sam’s Club, which also helped grow their customer base, although Sam’s Club now accepts Visa and American Express as well these days.

In the early days of Discover, Sears only accepted them, along with their retail cards, and did not accept Discover’s major competitors Visa and MasterCard, although only after they sold off the Discover Card along with its other financial holdings.

Sears Sells Off The Discover Card

The success of the Discover Credit Card did come at a price. In order to break into the major credit card market, and to have a fighting chance in doing it, this required spending more money on the project than business conditions really justified, and this was the main reason why Discover succeeded where other attempts at this did not.

Sears had both the willingness and the appetite for the kind of losses that were involved in this project, at least initially, as their main goal was to have the Discover Card be a component of their burgeoning financial empire, which they planned to offer in a retail setting in their stores.

This idea didn’t catch on as well as they hoped though, and before too long, it became clearer to them that this wasn’t going to work out that well. In the end, they decided that they would be better off selling off all of their financial holdings, including the Discover Card. Sears therefore chose to simplify and get more back to basics, what they did well over their company’s history, which was to focus on retailing.

Around this time, their retail market share was already starting to deteriorate due to the emergence of new competitors, especially Wal-Mart, who ended up unseating them as far as the country’s top retailer. In the early 90’s this was already underway, and with declining revenues, and the Discover Card finally becoming profitable after losing tens of millions of dollars during the first few years, Sears decided to cash in their hand,

Sears let Dean Witter go on its own, and the Discover Card along with it, in 1993, when they divested their interest in the company by way of an initial public offering, where Dean Witter became a separate company. This represented 20% of Sears’ value at the time, and provided an influx of cash so that they could better consolidate their core business.

The Discover Card prospered even more within the new, separate company, and now it could better focus on its primary objective as building their credit card brand, now free of whatever other objectives Sears had for it over the period under their control.

Today’s Discover Credit Card

The Discover Card continues to build their business, and have now extended their reach worldwide with the acquisition of Diner’s Club International, purchased from Citibank for $165 million in 2008.

Diners Club was the original major credit card, starting all the way back in 1950, and while they quickly got passed by the big major credit cards once they came on the scene, Diners Club still maintained a significant presence in many countries and certainly added to the reach of Discover once they acquired this card.

Some Diner’s Club cards have been co-branded as Discover Cards, although many of the cards still just bear the Diner’s Club brand. The main benefit of this deal is that this provides Discover with a global processing network, something that it has lacked up until this point.

The main idea here is to get Discover cards accepted in other countries, and this is the one area that they haven’t been able to compete with their major competitors, although this has really changed these days.

Discover is now owned by Morgan Stanley Dean Witter, following the merger between Morgan Stanley and Dean Witter in 1997. The brand that Sears carefully and aggressively created in the 1980’s is now in good hands, now boasting over 44 million cardholders, and is the world’s fourth most popular credit card these days.

Discover has also branched out into several other types of financial services, including things like loans and even banking.

The Discover Card does offer a number of features that many cardholders find very appealing indeed. The vision here was to have it exist as a viable alternative to the bigger name major credit cards, a vision that has been well achieved.

Discover Credit Cards FAQs

  • What does your credit score need to be to get a Discover card?
    Discover cards generally require a good credit score, over 700 generally. Credit card companies often do not have a hard limit on credit scores though and therefore in some cases may provide approvals to those who fall beneath the normal standard. Those with a credit score below 640 won’t get approved for a Discover card, but Discover also offers a secured option.
  • Which is the best Discover credit card?
    The Discover It Cash Back card will appeal to those who like cash back the most, with 5% cash back in rotating categories with no annual fee. Those who prefer to get their rewards in miles will be more interested in the Discover It Miles Travel Card, also with no annual fee, as well as no limit on the number of miles you can earn.
  • What bank has Discover Card?
    The Discover Card is owned by Discover Financial, and in addition to offering their credit card services, they also own Discover Bank which offers savings and checking accounts as well as personal and home equity loans. It’s not that Discover is owned and run by a bank, but the people who do own the card also own a bank.
  • Is Discover still owned by Sears?
    Discover was originally owned by Dean Witter Reynolds, from 1985-97, a subsidiary of Sears. It then became sold to Morgan Stanley who owned it until 2007, when Discover Financial took over. Discover did get its birth by it being offered to Sears customers to allow Sears to capitalize on this arrangement.
  • Why is discover not accepted everywhere?
    The Discover card is the third most popular credit card type in the United States, but it is not as widely acceptable as the top two are, Visa and MasterCard. The real reason behind this is that Discover, like American Express, charge higher merchant fees and therefore the merchants favor the lower fees of the big two.
  • Do gas stations accept Discover?
    Like with all merchants, whether or not one accepts a certain type of credit card such as Discover will depend on the merchant. There are some major gas stations that take Discover, like Chevron, and others that have decided to rely on their customers being willing to limit themselves to other forms of payment.
  • Do airlines accept Discover Card?
    Most U.S. airlines accept Discover cards for payment of airfare, but airlines in other countries may not. It is generally a good idea to carry either a Visa or MasterCard with you when you travel, especially to other countries, and both of these cards are universally accepted worldwide. You can also add your Discover card to your PayPal account.
  • Is Discover card good for building credit?
    Any actual credit card, where credit is extended, can build your credit history, even if you don’t use the card very much if at all. Even not using a credit card demonstrates restraint, and actually puts you in a lower risk profile than some who use it a lot. The less percentage of available credit that you use, the less risky you are seen to be.
  • Does Discover Student Credit Card Build Credit?
    Since the Discover Student Credit Card does offer the ability to borrow money, you can build your credit with it just like you can with any credit card. Students tend to have thin credit histories so getting this or another card can be particularly beneficial as they look to build themselves up for other forms of credit.
  • What is the average credit limit on Discover Card?
    The average starting credit limit for Discover cards is around $3000, although this does vary a lot depending on one’s income and credit score. The minimum starting credit limit for Discover is $300 and the maximum is $20,000. Discover cardholders are also eligible for periodic reviews of their credit limit.
Ken Stephens

Chief Editor,

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken:

Areas of interest: News & updates from the Federal Reserve System, Investing, Commodities, Exchange Traded Funds & more.