Discover 2009 Annual Report Download - page 43

factors, a reduction in the number of, or rates paid by, our merchants could materially adversely affect our business,
financial condition, results of operations and cash flows.
We may be unable to grow earnings if we are unable to increase or maintain the number of small and mid-size
merchants that participate in the Discover Network.
In order to expand our merchant acceptance among small and mid-size merchants, we have been entering into
agreements with and have been using third-party acquirers and processors to add merchants to the Discover Network
and accept and process payments for these merchants on an integrated basis with Visa and MasterCard payments. This
strategy could have unanticipated results, such as decreased revenues, higher expenses, degraded service and signage
placement levels and retaliatory responses from competitors. There can be no assurance that the use of third-party
acquirers and processors will continue to increase merchant acceptance among small or mid-size merchants, or that such
third-party acquirers will continue to participate with us if more attractive opportunities arise. If we are unable to continue
to increase or maintain small and mid-size merchant acceptance, our competitive position and our ability to grow
earnings could be adversely affected.
Our business, financial condition and results of operations may be adversely affected by the increasing focus of
merchants on the fees charged by credit card and debit card networks.
Merchant acceptance and fees are critical to the success of both our card issuing and payment processing businesses.
Merchants are concerned with the fees charged by credit card and debit card networks. They seek to negotiate better
pricing or other financial incentives as a condition to continued participation in the Discover Network and PULSE
Network. During the past few years, merchants and their trade groups have filed numerous lawsuits against Visa,
MasterCard, American Express and their card issuing banks, claiming that their practices toward merchants, including
interchange fees, violate federal antitrust laws. There can be no assurance that they will not in the future bring legal
proceedings against other credit card and debit card issuers and networks, including us. Merchants also may promote
forms of payment with lower fees, such as ACH-based payments, or seek to impose surcharges at the point of sale for use
of credit or debit cards. Merchant groups have also promoted federal and state legislation that would restrict issuer
practices or enhance the ability of merchants, individually or collectively, to negotiate more favorable fees. The
heightened focus by merchants on the fees charged by credit card and debit card networks could lead to reduced
merchant acceptance of Discover Network or PULSE Network cards or reduced fees, either of which could adversely
affect our business, financial condition and results of operations.
If we are unable to maintain successful relationships with the network licensees that issue Diners Club cards and that
maintain a merchant acceptance network, we may be unable to sustain and grow our international network business.
The success of Diners Club depends upon the cooperation and support of the network licensees that issue Diners Club
cards and that maintain a merchant acceptance network including Citigroup, which currently owns and operates network
licensees generating over 40% of the Diners Club network sales volume. As is the case for other card payment networks,
Diners Club does not issue cards or determine the terms and conditions of cards issued by the network licensees. Each
licensee issuer determines these.
Further, unlike the Discover Network, we have only a small number of direct merchant relationships in the Diners Club
network. Instead, we rely on network licensees located outside the United States to help us sustain and grow our
international business. As a result of a number of factors, including any difficulties in achieving card acceptance across
our networks, network licensees may choose not to renew the license agreements with us when their terms expire. In
addition, the increasingly competitive marketplace for cross-border issuance and acceptance of credit cards may result in
lower participation fees for the Diners Club network. In addition, many of the merchants in the acceptance network,
primarily small and mid-size merchants, may not be contractually committed to the network licensees for any period of
time and may cease to participate in the Diners Club network at any time on short notice. If we are unable to continue our
relationships with network licensees or if the network licensees are unable to continue their relationships with merchants,
our ability to maintain or increase revenues and to remain competitive would be adversely affected.
Political, economic or other instability in a country or geographic region, or other unforeseen or catastrophic events,
could adversely affect our international business activities and reduce our revenue.
Natural disasters or other catastrophic events, including terrorist attacks, may have a negative effect on our business
and infrastructure, including our information technology systems. Our Diners Club network, concentrated on primarily
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