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Sometimes, it pays not to be the number-one name in an industry.
Discover Financial Services(DFS - Get Report) embodies that. The firm is way behind its bigger rivals in terms of the number of transactions it processes and the dollar volume it moves, but that's enabled DFS to quietly and profitably build its market share over the last several years. Discover owns its namesake payment network as well as Diner's Club International, another closed-loop credit card network.
Discover has been working hard on its network, building up acceptance levels to even the playing field with league-leaders such as
(MA). While they're not there yet, DFS has clearly increased acceptance enough to move from being a niche to mainstream player in the credit card business. That fact should help Discover earn some more pricing power with its merchants, replicating the approach taken by
American Express(AXP). Deals with big name retailers such as
Wal-Mart (WMT) should continue to be lucrative for both parties. They give stores more attractive proprietary cards, and they give Discover a huge lead generation engine.
Because the biggest card issuer for Discover is Discover itself, the firm does carry credit risk. That said, DFS has done a good job handling liquidity, and has built up an attractive financial position. As more consumers move away from cash and checks and toward electronic payments, Discover should continue to grow faster than its bigger peers.
In the nearer-term, the firm's financials put it on track for a boost to its quarterly 10-cent payout.
Discover also shows up on lists of
9 Consumer Finance Stocks to Consider and
5 Leanest and Meanest Bank Stocks.