Remember when Sears was going to become an unstoppable financial services company? In 1981, Sears was the largest retailer in the United States. That was the year Sears purchased investment company Dean Witter Reynolds and real estate company Coldwell Banker & Co. It also owned a bank called the Greenwood Trust Company.
In the mid-1980s, Sears made a decision to get into the credit card business. But it wouldn’t just introduce a new card, it would launch a new set of rails to compete with Visa, MasterCard and American Express. It launched the Discover Card in Q4 1986, appealing to retailers by forgoing a percentage fee on purchases. It appealed to consumers with a higher-than-standard credit limit. The card took off, although many of the other big retailers refused to accept the card because of its association with Sears.
In the 1990s, Sears spun off its Dean Witter division, which contained Discover. It was rebranded Discover Bank in 2000, and it purchased the Pulse EFT network in 2005, which made it possible for Discover to issue debit and ATM cards.
Today, Sears is essentially on life support and Discover is destined to become part of Capital One, the company known for its TV commercials featuring celebrities who ask “What’s in your wallet?” Capital One announced Feb. 19 it would purchase Discover Financial in an all-stock deal valued at about $35 billion. The deal should be wrapped up in about a year, if regulators allow it. (Sen. Elizabeth Warren and others are calling on regulators to prevent the merger.)
You probably remember some of those TV commercials, which feature people like Taylor Swift, Charles Barkley, Larry Bird and Jennifer Garner. Capital One, kind of like Discover in its early days, wins new customers with market-leading benefits. One of Capital One’s biggest perks on some of its cards is double airline miles.
Capital One will benefit greatly from Discover’s payment rails, either using them directly or using them as leverage to obtain better pricing on the Visa and Mastercard networks they are using now.
While Sen. Warren is worried that additional consolidation in the payments space will mean fewer options for consumers, my sense is there is room for more players among the largest credit card companies.