Discover 2009 Annual Report Download - page 36

Many of our competitors are well established, larger than we are and/or have greater financial resources than we do.
These competitors have provided financial incentives to card issuers, such as large cash signing bonuses for new
programs, funding for and sponsorship of marketing programs and other bonuses. Visa and MasterCard each have been
in existence for more than 40 years and enjoy greater merchant acceptance and broader global brand recognition than
we do. Although we have made progress in merchant acceptance, we have not achieved market parity with MasterCard
and Visa. In addition, Visa and MasterCard have entered into long-term arrangements with many financial institutions
that may have the effect of discouraging those institutions from issuing credit cards on the Discover Network or issuing
debit cards on the PULSE Network. Some of these arrangements are exclusive, or nearly exclusive, which further limits our
ability to conduct material amounts of business with these institutions.
Visa and MasterCard also may enact new rules or enforce other rules in the future, including rules that could have the
effect of limiting the ability of issuing banks to use the PULSE Network, which may materially adversely affect our ability to
compete. For example, MasterCard enacted a rule requiring banks that issue MasterCard signature debit cards to also
participate in MasterCard’s affiliated PIN debit network. MasterCard and Visa completed initial public offerings, which
provided them with significant capital and may enhance their strategic flexibility. American Express is also a strong
competitor, with international acceptance, high transaction fees and an upscale brand image. Internationally, American
Express competes in the same market segments as Diners Club. We may face challenges in increasing international
acceptance on our networks, particularly if third parties that we rely on to issue Diners Club cards, increase card
acceptance, and market our brands do not perform to our expectations.
Furthermore, as a result of their dominant market position and considerable marketing and pricing power, Visa and
MasterCard have been able to increase transaction fees charged to merchants in an effort to retain and grow their issuer
volume. If we are unable to remain competitive on issuer interchange and other incentives, we may be unable to offer
adequate pricing to third-party issuers while maintaining sufficient net revenues. At the same time, increasing the
transaction fees charged to merchants or increasing acquirer interchange could adversely affect our effort to increase
merchant acceptance of credit cards issued on the Discover Network and may cause merchant acceptance to decrease.
This, in turn, could adversely affect our ability to attract third-party issuers and our ability to maintain or grow revenues
from our proprietary network. Similarly, the PULSE Network operates in the highly competitive PIN debit business with
well-established and financially strong network competitors (particularly Visa) that have the ability to offer significant
incentives and bundled products to financial institutions.
In addition, if we are unable to maintain sufficient network functionality to be competitive with other networks, or if our
competitors develop better data security solutions or more innovative products and services than we do, our ability to
attract third-party issuers and maintain or increase the revenues generated by our proprietary card issuing business may
be materially adversely affected. An inability to compete effectively with other payment networks could result in reduced
transaction volume, limited merchant acceptance of our cards, limited issuance of cards on our network by third parties
and materially reduced earnings.
In addition, the deterioration in the capital markets and costs of complying with recently enacted legislation has
adversely affected some of our issuers, merchant acquirers and licensees, which are financial institutions. The failures of
financial institutions and increased consolidation in the industry decrease our opportunities for new business and may
result in the termination of existing business relationships if a business partner is acquired or goes out of business. In
addition, financial institutions may have decreased interest in engaging in new card issuance opportunities or expanding
existing card issuance relationships, which would inhibit our ability to grow our payment services business.
If we are unsuccessful in achieving card acceptance across our networks, we may be unable to sustain and grow our
international network business.
In 2008, we acquired the Diners Club network, brand, trademarks, employees, and license agreements. We have
made significant progress toward, but have not completed, achieving card acceptance across the Diners Club network,
the Discover Network and PULSE to allow Discover customers to use their cards at merchant and ATM locations that
accept Diners Club cards in a growing number of countries around the world and to allow Diners Club customers to use
their cards on the Discover Network in North America and on the PULSE Network domestically and internationally.
The success of our acquisition of Diners Club depends upon our ability to maintain the full operability of the Diners
Club network for existing Diners Club cardholders, network licensees and merchants. We continue to rely on the
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