Discover 2009 Annual Report Download - page 17

customer service, whereas the operation of the Discover Network and our Payment Services business requires that we
invest in technology as well as relationships with issuers, merchants and merchant acquirers.
Credit Risk Management – Lending Products
Credit risk management is a critical and fully integrated component of our management and growth strategy. Credit
risk refers to the risk of loss arising from borrower default when borrowers are unable or unwilling to meet their financial
obligations to us. Our credit risk is generally highly diversified across millions of accounts without significant individual
exposures. Accordingly, we manage risk on a portfolio basis. See “– Risk Management” for more information regarding
how we define and manage credit and other risks.
New Customers (Account Acquisition)
We acquire new customers either through targeted marketing efforts or through unsolicited individual applications. In
either case, we have a rigorous process for screening applicants. In terms of identifying potential customers, our credit
risk management team uses proprietary targeting and analytical models to identify credit-worthy prospects and our
marketing team matches them with our product offerings. We give consideration to the prospective customer’s financial
stability, as well as ability and willingness to pay. We employ multiple acquisition channels, including direct mail,
internet, print advertising and telemarketing. Direct mail has historically accounted for the greatest proportion of our new
consumer accounts, representing more than half of all new accounts acquired in 2009. In order to make the best use of
our human and monetary resources used to acquire new accounts, we seek out production efficiencies, conduct creative
testing and aim to continuously improve our product offerings and enhance our targeting and analytical models.
We assess the creditworthiness of each applicant through our underwriting process. We evaluate prospective
customers’ applications using credit information provided by the credit bureaus and other sources. We use credit scoring
systems, both externally developed and proprietary, to evaluate customer and credit bureau data. We use experienced
credit underwriters to supplement our automated decision-making processes. Approximately 20% of all credit card
applications are subject to manual review that covers the areas of key customer data verification, fraud prevention and
approval of credit lines.
Upon approval of a customer’s application, we assign a credit line based on risk level, income and expected card
usage, and assign specific annual percentage rates (“APRs”) and terms for different customers and products. In
determining the APR, we use an analytical pricing strategy that provides competitive pricing for customers and seeks to
maximize revenue on a risk-adjusted basis.
Existing Customers (Portfolio Management)
Proactive management of a customer’s account is a critical part of credit risk management, and all accounts are subject
to ongoing credit assessment. This assessment reflects information relating to the performance of the individual’s Discover
account as well as information from credit bureaus relating to the customer’s broader credit performance. We utilize
scoring models (statistical evaluation models) to support the measurement and management of credit risk. At the
individual customer level, we use custom risk models together with generic industry models as an integral part of the
credit decision-making process.
Depending on the duration of the customer’s account, risk profile and other performance metrics, the account may be
subject to a range of account management treatments, including eligibility for marketing initiatives, limits on transaction
authorization, and increases or decreases in purchase and cash credit limits.
Marketing
In addition to working with our credit risk management personnel on account acquisition and portfolio management,
our marketing group provides other key functions, including product development, pricing strategy, customer
management, management of our Cashback Bonus and other rewards programs, fee product management, website
management and brand and advertising management.
Product Development and Customer Management
In order to attract and retain customers and merchants, we continue to develop new products, features, and benefits
and market them through a variety of channels, including mail, phone and online. Targeted offers may include balance
transfers, fee products and reinforcement of our Cashback Bonus rewards program. Through the development of a large
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