Discover 2009 Annual Report Download - page 37

assistance of Citigroup during a transition period for certain network and operational support services. If we were to lose
the assistance of Citigroup, we may face difficulty maintaining operations at the same level. We rely upon numerous
network partners for merchant acceptance for existing Diners Club customers. MasterCard’s termination of cash access
for Diners Club cardholders in the summer of 2009 limits the availability of cash access locations for Diners Club
cardholders to ATMs available through our PULSE Network and certain over-the-counter cash access locations. Also, we
have rerouted almost all merchant transactions for foreign Diners Club cards transacting in North America from the
MasterCard acceptance network to the Discover Network, which we expect to complete in 2010. If we are unable to
continue to offer either acceptable North American merchant acceptance or sufficient cash access locations to existing
Diners Club customers, we may experience decreased transaction volume, which would reduce our revenues. The long-
term success of our acquisition of Diners Club depends upon achieving card acceptance across our networks, which could
include higher overall costs or longer timeframes than anticipated. If we are unable to successfully achieve card
acceptance across our networks, we may be unable to achieve the synergies we anticipate and grow our business
internationally.
Our framework for managing risks may not be effective in mitigating risk of loss to us.
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have
established processes and procedures intended to identify, measure, monitor and report the types of risk to which we are
subject, including credit risk, market risk, liquidity risk, operational risk, legal and compliance risk, and strategic risk. We
seek to monitor and control our risk exposure through a framework of policies, procedures and reporting requirements.
However, there may be risks that exist, or that develop in the future, that we have not appropriately anticipated or
identified. If our risk management framework does not effectively identify or mitigate our risks, we could suffer
unexpected losses and could be materially adversely affected.
Our business depends on our ability to manage our credit risks, and failing to manage these risks successfully may
result in high charge-off rates, which would slow our growth and materially adversely affect our business, profitability
and financial condition.
Our success depends on our ability to manage our credit risk while attracting new customers with profitable usage
patterns. We select our customers, manage their accounts and establish terms and credit limits using proprietary scoring
models and other analytical techniques that are designed to set terms and credit limits to appropriately compensate us for
the credit risk we accept, while encouraging customers to use their available credit. The models and approaches we use
may not accurately predict future charge-offs due to, among other things, inaccurate assumptions. While we continually
seek to improve our assumptions and models, we may make modifications that unintentionally cause them to be less
predictive or incorrectly interpret the data produced by these models in setting our credit policies.
Our ability to manage credit risk and avoid high charge-off rates may be adversely affected by economic conditions
that may be difficult to predict, particularly the continuing deterioration in the consumer credit environment. In
anticipation of continued challenging economic conditions, we have increased our provision for loan losses as a result of
higher charge-offs and in anticipation of higher future charge-off rates. The full-year owned net charge-off rate was
7.45% for 2009, up from 4.59% in 2008. At November 30, 2009 and 2008, $712 million, or 3.01%, and $617 million,
or 2.45%, of our loan receivables were non-performing (defined as loans over 90 days delinquent and accruing interest
plus loans not accruing interest). We expect the challenges in the consumer credit environment to continue, leading to
increasing delinquency trends and higher charge-off rates. There can be no assurance that our underwriting and portfolio
management strategies will permit us to avoid high charge-off levels, or that our provision for loan losses will be sufficient
to cover actual losses.
A customer’s ability to repay us can be negatively impacted by increases in their payment obligations to other lenders
under mortgage, credit card and other consumer loans. Such changes can result from increases in base lending rates or
structured increases in payment obligations, and could reduce the ability of our customers to meet their payment
obligations to other lenders and to us. In addition, a customer’s ability to repay us can be negatively impacted by the
restricted availability of credit to consumers generally, including reduced and closed lines of credit. Customers with
insufficient cash flow to fund daily living expenses and lack of access to other sources of credit may be more likely to
increase their card usage and ultimately default on their payment obligations to us, resulting in higher credit losses in our
portfolio. Our collection operations may not compete effectively to secure more of customers’ diminished cash flow than
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