Discover Financial Services is a banking and payment company that has been quite successful over the past few years as far as generating income from loans, particularly student loans. Taking a look at the chart below (Student Credit Growth) the increase in student credit is incredible for the market sector. The company’s largest competitor in this market in terms of size and profitability is Wells Fargo that also offers student loans online. This already established market shows no signs of slowing down in the near future. The aim of the game is to have competitive rates amongst your peers, which is exactly what both companies have done. They also offer incentives in order to compete with their identical loan structures. While both of them can be seen as traditional banks, they have moved their student loan services and other lending options online putting them in-line with other competitive “online lenders” to compete for their own share of the market and gain a competitive advantage.
Online lenders compete in the market by taking several factors into consideration. These factors include but are not limited to cost of capital, customer service, and regulation. According to an article in the Huffington Post, the former administrator of the U.S. Small Business Administration Karen Gordon Mills “showed the relative strengths and weaknesses of banks vs. online lenders.” (1). Within the article is a table assessing the competitive advantages of traditional banks and online lenders. The highlighted advantages for traditional banks include “low cost capital from deposits, costly personal underwriting or reliance on FICO scores, large pool of existing customers, (and it’s) heavily regulated, (while pros for online lenders included) streamlined online application, response within minute or days, new credit algorithms, largely unregulated except at state level and by SEC.”