What Is Discover Card?

Discover Card is a credit card brand that is issued by the American financial services company, Discover Financial (DFS).

Originally issued by the retailer Sears Roebuck, & Co. in 1985, Discover cards first distinguished themselves for their reduced fee structure and pioneering cash-back rewards program. Today, Discover Cards are among the most widely accepted cards in the world, along with Visa (V), MasterCard (MA), and American Express (AXP).

Key Takeaways

  • Discover Card is a consumer credit card brand known for its cash-back rewards program and reduced fee structure.
  • Discover Financial issues its cards directly to its customers without using intermediate bank issuers and thus profits directly from the interest earned on their credit card balances.
  • Given its business model, Discover has an added incentive to encourage its customers to borrow more heavily on their cards than on those of their competitors.

How Discover Cards Work

From a consumer’s perspective, Discover Cards may seem quite similar to those offered under competing brands, such as Visa or MasterCard. However, behind the scenes there are some important differences between the workings of Discover Cards and those of its competitors.

We can see this by comparing Discover to Visa cards, for example. Whereas Visa simply licenses the use of its brand name to issuing banks, who then offer Visa-branded credit cards to their customers, Discover actually issues credit cards directly using its own brand.

For this reason, Discover Financial earns interest income from its credit card customers, in addition to charging payment processing fees to the merchants that accept the Discover Card as payment. Visa, by contrast, generates revenue from its payments network but does not directly profit from the credit card balances of its end-user. Discover's business model, in this way, is more similar to that of American Express, which is also a direct issuer.

With this in mind, it makes sense why Discover Cards have historically offered attractive terms to attract new users, such as being the first major credit card band to offer cash-back rewards. After all, the company’s profitability relies not only on increasing the card’s acceptance among merchants in order to increase transaction processing fees, but also on increasing the average outstanding balance of their cardholders.

Incentives to encourage customers to borrow more using their Discover cards, such as increasing credit limits or waiving annual account fees, make sense given Discover Financial’s overall business model.

Discover Cardholder Perks

Discover offers cards that primarily earn cash back, as well as one that offers generic airline miles (Discover It Miles). Discover's Cashback rewards program provides a percentage back on all purchases, with 5% cash back on rotating spending categories and merchants on eligible spending up to $1,500 each quarter (with 1% after that) and 1% on all other spending.

The following Discover cards earn those Cashback rewards:

  • Discover It Cash Back
  • Discover It Balance Transfer
  • Discover it Student Cash Back
  • NHL Discover It

Other Discover cards have a variations on the cash-back rewards structure. The Discover it Chrome and Chrome Student cards offer 2% cash back on restaurant and gas purchases and 1% on other spending. The Discover it Business card offers unlimited 1.5% cash back on all business-related purchases.

Real-World Example of a Discover Card

Let's say that Mia is considering applying for a new credit card. When researching her options, she notices that there is significant variation in the terms and features offered by the various cards. For instance, plain vanilla cards offer low fees in exchange for few if any rewards programs; while other cards, such as the “Discover it Cash Back” offered by Discover Financial, offer more generous rewards programs and cash-back benefits.

Although these differences are sometimes explained simply by the different annual percentage rates (APRs) and account fees associated with the cards, Mia learned that these variations are also caused by the distinct business models employed by the major credit card brands.

While some companies, such as Visa, generate money primarily from transaction volumes, other companies—such as Discover Financial and American Express—also lend money directly to their cardholders. For this reason, the companies that issue cards directly to their customers have an added motivation to offer rewards programs and other features that incentivize their customers to borrow more heavily on their cards.