Discover 2009 Annual Report Download - page 44

serving the global travel industry, could be adversely affected by international conditions that may result in a decline in
consumer or business travel activity. Armed conflict, public health emergencies, natural disasters or terrorism may have a
significant negative effect on travel activity and related revenue. Although a regionalized event or condition may
primarily affect one of our network participants, it may also affect our overall network activity and our resulting revenue.
Overall network transaction activity may decline as a result of concerns about safety or disease or may be limited
because of economic conditions that result in spending on travel to decline. The impact of such events and other
catastrophes on the overall economy may also adversely affect our financial condition or results of operations.
Visa and MasterCard may impose additional restrictions on issuing banks, merchants or merchant acquirers that
materially adversely affect our networks, or the Discover card issuing business.
Visa and MasterCard aggressively seek to protect their networks from competition and have used their rules and
policies to do so. For example, in the past they enacted and enforced rules that prohibited their member banks from
issuing cards on competing payment networks such as Discover. These rules were ultimately found to violate the antitrust
laws. They have adversely affected our business in the past, and they may have lingering effects going forward. Visa and
MasterCard also may enact new rules or enforce other rules in the future, including limiting the ability of issuing banks to
use the PULSE Network, which may materially adversely affect our ability to compete. For example, MasterCard has
issued a mandate requiring its signature debit issuing banks to also utilize MasterCard’s affiliated PIN debit network.
If fraudulent activity associated with our cards or our networks increases, our brands could suffer reputational
damage, the use of our cards could decrease and our fraud losses could be materially adversely affected.
We are subject to the risk of fraudulent activity associated with merchants, customers and other third parties handling
customer information. Credit and debit card fraud, identity theft and related crimes are prevalent and perpetrators are
growing ever more sophisticated. Our resources and fraud prevention tools may be insufficient to accurately predict and
prevent fraud. As we increase acceptance of the Discover card internationally, we may experience a higher fraud to sales
ratio. Our financial condition, the level of our fraud charge-offs and other results of operations could be materially
adversely affected if fraudulent activity were to significantly increase. In addition, significant increases in fraudulent
activity could lead to regulatory intervention (such as mandatory card reissuance) and reputational and financial damage
to our brands, which could negatively impact the use of our cards and networks and thereby have a material adverse
effect on our business. Further, fraudulent activity may result in lower license fee revenue from our Diners Club licensees.
If our security systems, or those of merchants, merchant acquirers or other third parties containing information about
customers, are compromised, we may be subject to liability and damage to our reputation.
Our security protection measures or the security protections of third parties participating in our networks may not be
sufficient to protect the confidentiality of information relating to customers or transactions processed on our networks.
Customer data also may be stored on systems of third-party service providers and merchants that may have inadequate
security systems. Third-party carriers regularly transport customer data, and may lose sensitive customer information.
Unauthorized access to our networks or any of our other information systems potentially could jeopardize the security of
confidential information stored in our computer systems or transmitted by our customers or others. As we increase
acceptance of the Discover card internationally, we may experience additional risks related to security systems. If our
security systems or those of merchants, processors or other third-party service providers are compromised such that this
confidential information is disclosed to unauthorized parties, we may be subject to liability. For example, in the event of a
security breach, we may incur losses related to fraudulent use of cards issued by us as well as the operational costs
associated with reissuing cards. The preventive measures we take to address these factors are costly, and may become
more costly in the future. Moreover, these measures may not protect us from liability, which may not be adequately
covered by insurance, or from damage to our reputation.
The financial services and payment services industries are rapidly evolving, and we may be unsuccessful in
introducing new products or services on a large scale in response to this evolution.
The financial services and payment services industries experience constant and significant technological changes, such
as continuing development of technologies in the areas of smart cards, radio frequency and proximity payment devices,
electronic commerce and mobile commerce, among others. The effect of technological changes on our business is
unpredictable.
-32-