How Discover is tapping into niche consumer segments as a pathway for growth

Can improving payment experiences lead to wider access to services and improved lifestyle choices? 

Research suggests it can influence outcomes, either directly or indirectly. A recent report from the Financial Health Network found that 62% of low-income consumers who switched to digital payment platforms reported increased access to services like healthcare and transportation.

Another consumer segment that often faces payment acceptance challenges is the armed forces and their families living on military bases, which operate like close-knit small towns. This segment too deals with barriers like limited merchant access and fewer payment options.

Routine errands, such as going to grocery stores, schools, and restaurants, often involve transactions conducted with a MILITARY STAR card. This card is mainly accepted at military exchanges and commissaries, forming a closed-loop network tailored for shopping in those specific locations. 

While it offers targeted benefits and discounts, the reliance on this limited payment method often constrains the number and diversity of merchants willing to operate on base. Many medium to large merchants often prefer to focus on a wider range of payment options that attract a broader customer base than investing in a location with relatively limited foot traffic and sales potential. In fact, more than half of merchants (53%) identify offering a diverse range of digital payment options as their leading strategy for enhancing conversions and driving revenue.

To address the limited acceptance of the MILITARY STAR credit card, the Army & Air Force Exchange Service (Exchange) has recently transitioned the card’s network to the Discover Global Network. This creates a significant opportunity for merchants on the Discover network to engage with a new niche market.

The penetration of a new consumer segment

Discover plans to roll out upgraded technology for the MILITARY STAR card in stages. The upgraded card will include EMV chip technology and allow for contactless payments, expanding payment options with tap-to-pay and mobile wallet features for a smoother user experience. Existing cardholder perks will stay in place.

The idea of enhancing access to retailers on military bases and embracing modern payment methods for service members and their families strongly resonates with Jason Hanson, President of Payment Services at Discover Financial Services.

“The main goal of our collaboration with the Army & Air Force Exchange Service (AAFES) is to allow for more on-installation merchants to accept the preferred card for those who have served our country,” said Hanson.

As a former US Army veteran who served five years and once held a MILITARY STAR card himself, Hanson brings a personal connection to this newly formed relation between the Exchange and Discover. 

With almost six years in the payments industry after his military service, he understands the specific needs of military members and the payments landscape. In his current position, Hanson is responsible for Discover’s Payment Services segment and oversees Discover Global Network, PULSE, and Diners Club International. 

The importance of focusing on niche consumer segments

In recent years, Discover has leveraged a key growth strategy that focuses on engaging niche consumer segments and enhancing customer loyalty, among other initiatives. The secret sauce of this approach can be seen in the firm’s strategic moves: a concentrated focus on a niche yet widely recognized customer base carried out through a measured approach. 

Other niche consumer segments targeted by the payments firm over the years include students and the LGBTQ+ community. The Discover Student Card was initially launched in 2014, offering two primary variations: the Discover it Student Cash Back and the Discover it Student Chrome, which has evolved with various design and benefit updates over time. The Discover it Pride Card was introduced in June 2019, specifically catering to the LGBTQ+ community.

This explains how Discover’s recent relationship with the Exchange aligns with the payments firm’s overarching growth objectives.

Through its focus on niche consumer segments, Discover aims to:

1. Unlock potential opportunities: Take, for instance, the MILITARY STAR card. The card, as noted by Hanson, is held by 1.3 million cardholders and generates $2 billion in annual spending. 

By acquiring the network linked to this card, Discover is positioning itself to access the armed forces consumer segment, thereby expanding its market presence and enhancing its merchants’ ability to reach a new demographic of customers.

“We always strive to expand our footprint as a Network, and this agreement allows us to do that,” noted Hanson. “This partnership brings volume to the Discover Network, supports the company’s growth, and is a win for our merchant partners.”

2. Widen the scope of demographic engagement: The Student Card and Pride Card are among Discover’s niche products that have contributed to the firm’s quarterly earnings over the years.

However, the effects of inflation have surfaced sporadically in recent quarters. In Q1 2024, Discover’s credit card transaction volume amounted to $50.1 billion, marking a decrease of 1% compared to the prior-year quarter, according to CFO John Greene. 

Breaking into more reliable niche markets with sticky spending, such as military installations, can offer the company a protective layer during difficult economic periods. 

3. Put inclusion and diversity to the right use: Research shows that a diverse team can better align with the specific needs of niche customer segments and outperform their homogenous counterparts in problem-solving and creativity.

For instance, Hanson brings a perspective to his role as a payments executive for the MILITARY STAR card, thanks to his background as a veteran consumer. This dual experience enables him to guide how products and services can effectively cater to the armed forces segment.

To support its own employees from different backgrounds, Discover has created eight internal Employee Resource Groups (ERGs) to enhance access, opportunities, and visibility for these groups. Among these ERGs are the Pride ERG, which supports the LGBTQ+ community within Discover, and the Honoring Military Veterans (HMV) ERG, which offers a support network for employees who are military members, veterans, or have ties to the military community. 

Elaborating on the HMV group, Hanson noted, “It aims to bring awareness and understanding of military-related activities and volunteering within the community.”

Future direction in building vendor relationships

Looking ahead, Discover is focusing on delivering payment solutions that not only fulfill consumer and merchant needs but also keep pace with advancing technology, according to Hanson. 

He also noted that the company is identifying significant opportunities in the technology realm, particularly within the AI sector, where it has started to experiment and explore new prospects. 

“We are committed to partnerships that allow our customers to solve their payment challenges through improved expertise and robust technologies,” said Hanson.