Discover Financial (DFS -0.46%) has started the new year on the front foot with the launch of a new credit card named 'Discover it.'
The company's website lists a number of features offered via the new card, but the line that stands out is that cardmembers will not be charged annual fees. Discover will look to attract market share in the U.S., where it currently stands third in terms of cards in use, with around 50 million cardholders.
Credit cards are Discover's most important business, accounting for about 80% of revenues and gross profit. Around 66% of revenues are derived from interest income from credit loans, with another 16% coming from fees charged to merchants accepting Discover cards.
The company is looking to expand its global operations. It is currently in fourth place in terms of dollar volume of purchase transactions in the U.S., behind Visa (V +0.02%), American Express (AXP +0.12%) and MasterCard (MA -0.43%).
Discover's main competitor is American Express, as both companies issue their own cards through banking subsidiaries, whereas Visa and MasterCard cards are issued by third-party banks. American Express charges an average annual fee of $45 per card. With no annual fees the "Discover it" card might help Discover increase the number of cards in circulation, but the company is already ahead of Amex in this regard. American Express has about 30 million cards in use in the U.S. but customers tend to spend more on its cards than on Discover cards.
According to the November issue of the Nilson Report, over $432 billion was spent on 2 billion transactions with American Express credit cards in the first nine months of 2011. For Discover, volume during the same period was $90 billion on 1.38 transactions. These figures indicate that Discover needs to promote spending on its credit cards.
Discover has seen a healthy growth in sales volume over the last two years but this is primarily due to increased adoption of credit cards across the country. We currently forecast a low-single-digit growth rate for the company's sales volume in the coming years, but if it can increase customer spend per credit card to even half the American Express level there might be an upside of 20% to the current price. You can modify the interactive chart below to gauge the effect a change in spend volume would have on our price estimate.