Discover 2009 Annual Report Download - page 42

Results of Operations – Liquidity and Capital Resources – Additional Funding Sources.” Although we currently have no
outstanding balances due under the facility, the terms of the facility impose certain restrictions and future indebtedness
may impose various additional restrictions and covenants on us (such as tangible net worth requirements) that could have
adverse consequences, including: limiting our ability to pay dividends to our stockholders; increasing our vulnerability to
changing economic, regulatory and industry conditions; limiting our ability to compete and our flexibility in planning for,
or reacting to, changes in our business and the industry; limiting our ability to borrow additional funds; and requiring us
to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds
available for working capital, capital expenditures, acquisitions and other purposes.
We may be unable to increase or sustain Discover card usage, which could impair growth in, or lead to diminishing,
average balances and total revenue.
A key element of our strategy is to increase the usage of the Discover card by our customers, including making it their
primary card, and thereby increase our revenue from transaction and service fees and our receivables. However, our
customers’ use and payment patterns may change because of social, legal and economic factors, and customers may
decide to use debit cards instead of credit cards, not to increase card usage, or to pay the balances within the grace
period to avoid finance charges. We face challenges from competing credit card products in our attempts to increase
credit card usage by our existing customers. Our ability to increase card usage also is dependent on customer
satisfaction, which may be adversely affected by factors outside of our control, including competitors’ actions and
legislative/regulatory changes. The CARD Act limits pricing changes that may impact an account throughout its lifecycle,
which may reduce the availability of lower price promotions to drive account usage and customer engagement. As part of
our strategy to increase usage, we have been increasing the number of merchants who accept cards issued on the
Discover Network. If we are unable to continue increasing merchant acceptance of our cards, our ability to grow usage of
Discover cards may be hampered. As a result of these factors, we may be unable to increase or sustain credit card usage,
which could impair growth in, or lead to diminishing, average balances and total revenue.
We may be unable to grow earnings if we fail to attract new customers, or if we attract customers lacking favorable
spending and payment habits.
We seek to attract new customers who will use their Discover cards, meet their monthly payment obligations and
maintain balances that generate interest and fee income for us. We are subject to substantial competition from other
credit card issuers for these new customers. We may not have adequate financial resources to permit us to incur all of the
marketing costs that may be necessary to maintain or grow our receivables or to attract new accounts. The spending and
payment habits of these new customers may not be sufficient to make their accounts as profitable as we expect. In
addition, our risk models may not accurately predict the credit risk for these new customers, which could result in
unanticipated losses in future periods. To the extent that the spending and payment habits of new customers do not meet
our expectations, our earnings and growth may be negatively affected.
Our transaction volume is concentrated among large merchants, and a reduction in the number of, or rates paid by,
large merchants that accept cards on the Discover Network or PULSE Network could materially adversely affect our
business, financial condition, results of operations and cash flows.
Discover card transaction volume was concentrated among our top 100 merchants in 2009, with our largest merchant
accounting for nearly 10% of that transaction volume. These merchants may pressure us to reduce our rates by continuing
to participate in the Discover Network only on the condition that we change the terms of their economic participation.
Loss of acceptance at our largest merchants would decrease transaction volume, negatively impact our brand, and could
cause customer attrition. At the same time, we are subject to increasing pricing pressure from third-party issuers as a
result of the continued consolidation in the banking industry, which results in fewer large issuers that, in turn, generally
have a greater ability to negotiate higher interchange fees. In addition, some of our merchants, primarily our small and
mid-size merchants, are not contractually committed to us for any period of time and may cease to participate in the
Discover Network at any time on short notice.
Actual and perceived limitations on acceptance of credit cards issued on the Discover Network or debit cards issued on
the PULSE Network could adversely affect the use of the Discover card by existing customers, the attractiveness of the
Discover card to prospective new customers and interest of other financial institutions in issuing cards on the Discover
Network or the PULSE Network. We may have difficulty attracting and retaining third-party issuers if we are unable to
add and retain acquirers or merchants who accept cards issued on the Discover or PULSE Networks. As a result of these
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