Discover 2009 Annual Report Download - page 22

In order to increase merchant acceptance, Discover Network has sold the majority of its small- and mid-size merchant
portfolios to third-party merchant acquirers to allow them to offer a comprehensive payments processing package for
small- and mid-size merchants. Merchants can also apply to our merchant acquirer partners directly to accept Discover
Network cards through the acquirers’ integrated payments solution. Merchant acquirers provide merchants with
consolidated servicing for Discover, Visa and MasterCard transactions, resulting in streamlined statements and customer
service for our merchants, and reduced costs for us. These acquirer partners also perform credit evaluations and screen
applications against unacceptable business types and the Office of Foreign Asset Control Specifically Designated
Nationals list.
Discover Network operates systems and processes that seek to prevent fraud and ensure compliance with our operating
regulations. Our systems evaluate incoming merchant sales activity to identify abnormalities that require investigation
prior to the initiation of settlement. Designated Discover Network personnel are responsible for validating compliance
with our operating regulations and law, including enforcing our data security standards and our prohibitions against
internet gambling and other illegal or otherwise unacceptable activities. Discover Network is a founding and current
member of the Payment Card Industry (“PCI”) Security Standards Council, LLC, and requires merchants and service
providers to comply with the PCI Data Security Standard.
Technology
We provide technology systems processing through a combination of owned and hosted data centers. These data
centers support our Discover and PULSE Networks and Diners Club processing, provide customers with access to their
accounts and manage transaction authorizations, among other functions. Discover Network works with a number of
vendors to maintain our connectivity, which that enables continuous support of POS authorizations. This connectivity also
enables merchants to receive timely payment for their Discover Network card transactions.
Our approach to technology development and management involves both third-party and in-house resources. We use
third-party vendors for basic technology services (e.g., telecommunications, hardware and operating systems). We
subject each vendor to a formal selection process to ensure that the vendor can assist us in maintaining a cost-effective
and reliable technology platform. This approach enables us to focus our in-house resources on building proprietary
systems (e.g., for customer and merchant settlement, authorizations and customer relationship management) that we
believe enhance our operations, improve cost efficiencies and help distinguish us in the marketplace.
Seasonality
Although we experience fluctuations in our sales and transaction volumes related to seasonal changes in consumer
spending patterns, our results of operations are not significantly impacted by seasonality.
Competition
We compete with other consumer lenders and networks on the basis of a number of factors, including brand,
reputation, reward programs, customer service, merchant acceptance, product offerings, incentives, and pricing. As a
credit card issuer, we compete for accounts and utilization with cards issued by other financial institutions (including
American Express, Bank of America, Capital One, JPMorgan Chase and Citigroup) and, to a lesser extent, businesses
that issue their own private label cards or otherwise extend credit to their customers. In comparison to our largest
competitors, our strengths have included cash rewards, conservative portfolio management and strong customer service.
We have increasingly offered our customers other lending products, including personal and student loans, although
our credit card receivables continue to represent substantially all of our managed receivables (93% and 97% at
November 30, 2009 and 2008, respectively). Some of our competitors offer a wider variety of loan products than we do,
including automobile and home loans, which may position them better among customers who prefer to use a single
financial institution to meet all of their financial needs. There has been a trend toward consolidation among credit card
issuers, leading to greater concentration of resources. Some of our competitors enjoy greater capital resources than we
do, and are therefore able to invest more in initiatives to attract and retain customers, such as advertising, targeted
marketing, account acquisitions and pricing competition in interest rates, annual fees, reward programs and low-priced
balance transfer programs.
Because most domestically issued credit cards, other than those issued on the American Express network, are issued on
the Visa and MasterCard networks, most other card issuers benefit from the dominant marketing position and pricing
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