Discover - Why They're Successful

[Music] discover Financial Services is a Fortune 500 company that as the name suggests offers a wide variety of financial services to the public they are among the biggest in the industry so chances are a lot of the viewers here have dealt with them in some way either in personal checking personal loans student loans mortgages but the thing that they are most known for is the Discover credit card it has a dedicated user base of around 50 million card holders in the United States making them one of the big four credit card networks yeah in the US there are four credit cards that stand out far above all the others Visa Mastercard American Express and impressively discover here is why I think it is so impressive you have to understand that credit cards or charge cards as we picture them hardly existed before 1950 there were stores out there that would extend credit to their customers but the idea of a single card that could be used at multiple locations was practically unheard of before the introduction of the diner Club card in 1950 I made a video about Visa versus MasterCard that details the formation of the industry but the short version is that Visa Mastercard and the American Express card all emerged in those early days in the 195s and 60s and were responsible for making credit cards popular and once everything was established it became very very difficult I would say almost impossible to popularize a new credit card because the barrier to entry is so high all right look if I wanted to start a new one I would have two major obstacles to overcome I would have to convince the merchants you know the stores and the people selling the stuff to accept the card and I would have to convince the customers the general public to get the card but the merchants only accept the card if their customers have it and the customers only want to get it if the merchants accept it do you see the issue there that is why I think it is so impressive that discover has been the only card to break into that system in a major way once it was already a established by the others discover did not exist until 1985 when it was started by Sears I realize that department stores become more of a joke today as maybe the biggest ever failure in retail but in the 1980s it was still a strong brand that was just starting to show signs of trouble Walmart and Kmart and other competitors were growing fast taking away customers and Sears response in part was to expand their reach into different areas mainly Financial Services they were already the owners of All State Insurance having started it back in the 1950s they had recently bought a major real estate brokerage called Coldwell Banker and a major stock brokerage called Dean Witter Reynolds Sears was still one of the most trusted names out there so part of the reasoning here was that they would carry over the trust and the brand loyalty that they had built with their customers and use it to sell them a bunch of other stuff that Walmart was not providing them like Insurance houses stocks and eventually credit cards the Discover card was introduced in September of 1985 in select test markets mainly in San Diego and Atlanta the first ever purchase was for $26.77 made at a Sears store by Sears employee the big things that made discover standout from all of the other cards on the market was that it did not have an annual fee somewhat uncommon back then but more importantly it is credited with being the first major card to provide Cash Back Rewards it was kind of a game changer because even today it remains a big thing that discover is known for specifically with their Discover It Card providing 5% cash back on select purchases and 1% on all others but it has been adapted by many other credit cards at this point I imagine it's one of the biggest factors people consider when choosing a new one so back in 1985 when they were the only ones offering cash back that was an attractive reason to apply for it in fact they pushed up the national launch date by 4 months because there was so much demand for it in those test markets they said application for it were four times higher than they had expected plus that new date allowed them to launch it alongside a Super Bowl commercial featuring their dawn of discover campaign that was complemented with full page magazine and newspaper ads I mean they were really investing in this the company lost over 100 million dollars that year because they had spent so much money launching the Discover card then naturally since there were millions of people receiving Discover Cards that was motivation for the merchants to agree to accept it over 200,000 of them before the national launch and more than million of them by the end of the decade in addition to Sears itself the country's biggest retailer refused to accept the other big three cards so if you wanted to buy something from them it was either cash the Sears store card or discover can you imagine that people were applying for Discover Cards just so they could buy stuff from Sears which may not have been the most helpful for the stores themselves turning away customers trying to use the competing cards but it sure helped jump start the Discover Network by the 1990s Sears was still struggling with Walmart surpassing them as the country's new largest retailer clearly their new strategy wasn't as effective as they had hoped so they were looking to reconcentrate their efforts toward the stores and divest most of their financial services most notably they spun off Dean Witter into its own publicly traded company a move that actually led to discover being accepted by more major retailers throughout the country see they had previously been hesitant because accepting discover was like supporting their competitor when they were part of Sears so now that they were separate everyone started accepting discover seir started accepting the other cards and it was a big step toward all the stores accepting all the cards today discover claims to be accepted by 99% of all places that take credit cards I think proving that they have successfully broken into this system at a level that nobody else has been able to I should mention that it merged with Morgan Stanley in 1997 before yet again being spun off into its own company about a decade later ever since they have been operating on their own and doing their best to expand internet nationally in 2005 they made a deal with union pay in China where each other's cards would be accepted at places in each other's countries in 2008 I think it's pretty cool that they bought Diner Club the original charge card they had become a sizable International brand so buying it helped discover be accepted at an additional 8 million locations outside of North America with $30 billion in annual credit card purchases in 2012 they made deals with banks in Ecuador and Russia to issue the first Discover Cards outside of the US now I want to make a distinction between the credit card issuers and the networks visa and MasterCard are credit card networks that are issued by various Banks those banks are the ones collecting interest from customers and fees from Merchants visa and MasterCard collect licensing fees from banks in exchange for the rights to issue cards using their name and their system I know it's all tricky I'm just trying to convey that visa and MasterCard do not issue their own cards it's the banks that do it nower American Express and discover are operating with a different strategy in that they do issue their own cards in fact in 2004 discover filed an antitrust lawsuit against visa and MasterCard claiming that they were preventing the banks from issuing cards for other networks you know like Visa making a deal with a bank saying that you can issue our card and MasterCard as long as you stay away from discover and all the others allegedly it was a big lawsuit that lasted for 4 years and was ultimately settled for almost 3 billion less than half of what they were seeking but still the third largest antitrust settlement in the US at that point and there was a similar settlement with American Express so again you can see how difficult it has been to compete in the credit card industry since the banks are much less involved American Express and discover are more motivated to get customers to spend money and use the cards as I mentioned before they both provide Cash Back Rewards if people get a percentage of their purchase back they're more likely to use the card for that purchase and they both rely on transaction fees from the merchants the biggest difference between the two is how they collect money from the customers American Express is more of a luxury brand that makes money through Annual fees that are paid just to have the card rather than interest from revolving balances again I have a whole video about them that goes into more detail and if you watch it you will see that discover is almost the exact opposite and that they offer no annual fees but collect a lot of interest from that balance not being paid off at the end of the month American Express customers tend to be considerably wealthier than discover customers reflected by much higher average transactions so they are appealing to much different demographics so even though there are technically more discover customers way more money is being spent with American Express cards and visa and MasterCard by most measures discover is the smallest of the big four their value on the stock market is only a fraction of the others but there is still a lot of value in their business especially for a company like like Capital 1 in February of 2024 it is still all new as I'm making this video Capital 1 agreed to acquire discover financial services for $35 billion in an all stock deal that is higher than their value on the stock market it would be the first time they'll be operating under a larger company in 17 years keep in mind there is a fair chance that it might not be approved it is a wild industry with a lot of positives and negatives to consider from the outcome but it would be interesting Capital 1 is one of the country's biggest credit card issuers they're one of the main banks that gives people Visa in MasterCards and obviously if they combine with discover there would be motivation to issue more Discover Cards it sort of reminds me of when they were owned by Sears being part of a larger company that's boosting them forward to compete against the bigger Rivals that's pretty much how they broke into the category in the first place so again way more to consider than I could possibly include in this video but the combination would create the country's biggest credit card company when measured by loan volume the good news for discover is that credit card debt in the United States is at an all-time high surpassing a trillion dollars for the first time ever in 2023 and credit card interest rates are at all-time highs since discovers model relies on the interest they collect there could be good times ahead for them if this trend continues all things to consider for the future of discover and probably a big part of the reason Capital One is willing to pay 35 billion dollar to acquire them let me know in the comments what do you see for the future of discovery do you think they have a chance of ever becoming bigger than the other major 3 networks or is that something that just seems impossible America's worsening debt situation combined with capital 1's backing could potentially propel them forward but to what extent and it's also unpredictable finally are you in fact a Discover card holder did they lure you in with the Cash Back Rewards or were the competitors offering something that you felt was more attractive on a global scale it looks like they still struggle to be as widely accepted as the others but in the United States it is 90 9% acceptance so at this point I can't imagine that's factoring into your decision too much and any other thoughts you have about discovered or any of the other cards leave them in the comments I'd like to hear what you have to say it pays to discover thank you for [Music] watching

Channel: Company Man

Views: 104,757

Keywords: Discover, Discover Financial Services, Discover Card, Credit Card, Mastercard, Visa, American Express, Debt, Bank, Finance, Financial, Success, Business

Id: vtL_OoTfQHE

Length: 11min 26sec (686 seconds)

Published: Wed Feb 28 2024