Discover Ventures into Bank-Branded Credit Cards
By Eva Norlyk Smith, Ph.D.
October 27, 2010
Discover Financial Services and First National Bank of Omaha recently announced a partnership that will give the First National Bank of Omaha customers access to a new, co-branded Discover card beginning in 2011, according to a report from Zack’s Investment Research.
For both companies, the agreement offers a unique opportunity for business expansion. With the agreement, First National Bank of Omaha becomes one of the few banks in the country to issue credit cards co-branded with all four credit card companies: Visa, MasterCard, American Express, and Discover. For Discover, the new partnership offers access to a broader market and the opportunity to greatly increase the number of Discover Cards accounts and transactions.
Even as credit card issuers continue to struggle, Discover Card has been in an expansion phase over the past few years. Like other credit card lenders, Discover Financial Services has been hit with record charge offs and delinquencies along with lower levels of consumer credit card usage. Even so, Discover Financial Services still managed a 5 percent increase in earnings on a year-over-year basis through a combination of higher consumer spending on Discover Cards and rising merchant acceptance rates.
Like American Express, Discover both issues Discover-branded credit cards and processes the transactions made with the cards. Visa and MasterCard, in contrast, simply license their credit card brand to banks, which issue credit cards, and then use the Visa and MasterCard electronic payment networks to process the charges made with the cards.
By entering into the agreement with First National Bank of Omaha to issue co-branded cards, Discover is taking a first step in the direction of the brand-licensing business model used by Visa and MasterCard. The move follows on the heels of a large increase in merchant acceptance of Discover cards over the past few years. Discover has worked aggressively with third party merchant-acquiring organizations to sign up more merchants for credit card acceptance. By April this year, the company had increased the number of merchants accepting Discover credit cards in North America from 77 percent in 2007 to nine out of ten merchants, making Discover Cards as universally accepted as American Express.
Discover Card also recently entered into a four-year agreement to be the official sponsor of the next four Orange Bowl football games. According to the deal, Discover’s orange and black logo will be integrated into the Orange Bowl logo and integrated into the ESPN network’s college football coverage.
Discover Cards were launched in 1986, making the company a relative newcomer on the credit card scene compared to credit card rivals Visa, MasterCard and Amex. Discover Cards initially gained its competitive advantage by issuing some of the first cash back credit cards with some of the more attractive terms in the industry. Discover has since ventured into the travel rewards credit card market as well, with credit cards like the Escape by Discover Card and the Miles by Discover Card.