The History of the Discover Credit Card

Did you know that the Discover Card was the brainchild of Sears?

first-discover-cardDuring the 80’s, Sears, Roebuck and Co. wasn’t just the largest retailer in America. They were a diversified conglomerate spread across multiple industries, including finance services.

Sears purchased Coldwell Banker real estate and the Dean Witter brokerage firm in 1981. The Discover card came to fruition in 1985, after the concept was conceived by a Sears credit manager, Ray Kennedy, Sr. (who happens to be the father of Ray Kennedy, a Grammy-winning country singer of the 80’s and 90’s).

This new Discover card made its debut during a memorable 1986 Super Bowl commercial. It shook the rather staid credit card industry to its foundations because:

  • It had no annual fee, which was unheard of at the time.
  • The card gave cash back rewards also unheard of at the time.
  • Credit limits were often higher than comparable Visa/MasterCards

As a result, the Discover card’s popularity exploded almost overnight. It was heavily marketed to Sears shoppers and became the only credit card they accepted. This was part of a broader goal to create one-stop financial service centers within their stores, which even provided investment and brokerage services through Dean Witter. However, that idea didn’t quite pan out as expected because…

Reason #1: Other retailers were hesitant to accept the Discover card for payment, because in doing so it would be helping their rival, Sears.
Reason #2: By the late 80’s the competitive landscape had changed. Sears’ market share was being nipped away by “category killer” retailers like Toys “R” Us and Best Buy, as well as the growing discount goliath, Walmart.

dean-witter-sears-logoSears realized they had to focus on the bread and butter retail business. So during the 90’s, they sold and spun off most of their non-retail operations, including Dean Witter Reynolds, which was the parent-company of the Discover card business.

By the end of 1993, Dean Witter had become a completely separate entity and their Discover division was nothing to sneeze at. In 1995, Discover (along with their NOVUS payment network) made up 52% of Dean Witter’s earnings in 1995, which were a total of $788 million.

Dean Witter merged with Morgan Stanley in 1997, which created one of the largest brokerage firms in the world. However, Discover’s history of becoming a 100% independent entity didn’t occur until a decade later.

Morgan Stanley spun off the Discover card division in an IPO on June 30, 2007. The timing is surely no coincidence, as MasterCard and Visa went public in 2006 and 2008, respectively.

As of January 2015, the market cap (valuation of the company) is approximately $29 billion. For comparison, MasterCard is approximately $97 billion and Visa is $162 billion. The discrepancy is largely because Discover primarily focused on the U.S. domestic market early on, while Visa and MasterCard have a larger global presence. However, as time proceeds, that will likely change as Discover plays catchup to those two titans.

The Discover of today

discover-logoThe company has come a long way in a relatively short amount of time, considering that Visa and MasterCard had a two-decade head start, and there are huge barriers to entry for launching a viable new credit card processing operation and brand.

Today, Discover has well over 50 million cards in circulation. And for those who joke about their cards having limited acceptance, that no longer holds true. Back in 2010 they reached a historic benchmark – Discover acceptance has exceeded 90%. Now, over 90% of U.S. merchants who accept Visa/MasterCard also take Discover.

Furthermore, Discover is now actually beating Visa and MasterCard in many foreign markets. Thanks to a partnership forged with UnionPay Network of China, they’re the most accepted card in the country. There’s also a similar arrangement with the JCB network in Japan.

When Discover acquired the Diners Club payment network in 2008, it expanded their international acceptance even further. Yes, it’s true that the Diners Club brand name has a dismal presence these days in the U.S., but they still had a significant international payment network. By merging those operations with Discover’s North American operations, the company now has its own global payment processing network.

The best credit card offers from Discover

Many people are surprised to learn that attaining a Discover card is no easy feat. You need a good credit score to have a shot at approval. This is understandable, given that you get generous rewards and 100% U.S.-based customer service that, during many years, has been tied with American Express for being the best in the nation (according to J.D. Power & Associates).

In prior years, there were a variety of Discover cards available:

More – No annual fee. 5% cash back in rotating categories.
Escape – $60 annual fee. 2% rewards which are good towards travel.
Open Road – No annual fee. Up to 2% cash back at gas stations and restaurants.
Miles – No annual fee. 1% to 2% rewards which can be used for travel.
Motiva – No annual fee. Up to 1% but mainly geared towards those who carry a balance.

However, in 2013, the company made a major strategic decision by launching a new card which would serve as a replacement for all of the aforementioned products. This new card was called the “Discover it” and it was among the highest-rated reward programs available. In 2014, they went further and launched the Discover it chrome card that offered a simpler 2% cash back reward structure on gasoline and 1% on all other purchases rather than the it’s quarterly rotating 5% categories. For 2015 this dual product strategy looks like it will be around for a while as Discover continues its growth trajectory.