Discover 2009 Annual Report Download - page 86

Fee Products
We earn revenue related to fees received for selling ancillary products and services including debt deferment/debt
cancellation and identity theft protection services to customers. The amount of revenue recorded is generally based on
either a percentage of a customer’s outstanding balance or a flat fee and is recognized over the agreement or contract
period as earned. Fee products income increased $45.3 million, or 18%, and $35.2 million, or 16%, for the years ended
November 30, 2009 and 2008, respectively, as compared to the years ended November 30, 2008 and 2007, primarily
related to an increase in the number of customers that purchased these products and services as well as higher balances
upon which the fees are based.
Merchant Fees
To broaden merchant acceptance of Discover Network cards, we began outsourcing our acquisition and servicing of
small and mid-sized merchants to merchant acquiring organizations in late 2006. In addition, we have sold small and
mid-size merchant portfolios to third-party acquirers to facilitate integrated servicing and to reduce costs. As we move
away from direct merchant relationships, our merchant fee income and related costs will decline. The lower cost per
transaction is generally expected to be offset by increased volume due to broader acceptance. Gains on the sale of
merchant acquiring portfolios are reflected in other income as earned.
Merchant fees consist primarily of fees charged to merchants for various services including manual authorization of
transactions and delivery of hardcopy statements. For the years ended November 30, 2009 and 2008, merchant fees
decreased $22.8 million, or 34%, and $25.5 million, or 28%, as compared to the years November 30, 2008 and 2007,
respectively. The decrease in both periods is due to increased outsourcing to merchant acquirers. As merchant acquiring
portfolios are sold to third-party merchant acquirers, this revenue will decrease along with associated costs.
Transaction Processing Revenue
Transaction processing revenue represents switch fees charged to financial institutions and merchants for processing
ATM, debit and point-of-sale transactions over the PULSE Network, as well as various participation and membership fees.
Switch fees are charged on a per transaction basis. Transaction processing revenue increased $9.3 million, or 8%, and
$16.3 million, or 16%, for the years ended November 30, 2009 and 2008, respectively, as compared to the years
ended November 30, 2008 and 2007, primarily due to increased volumes partially offset by pricing incentives offered to
financial institutions, which are accounted for as an offset to revenue.
Loss on Investment Securities
Loss on investment securities includes realized gains and losses on the sale of investments as well as any write-downs of
investment securities to fair value when the decline in fair value is considered other than temporary. During the year
ended November 30, 2009, we recorded an $8.2 million write-down of the asset-backed commercial paper notes of
Golden Key U.S. LLC, which invested in mortgage-backed securities, partially offset by $5.4 million of income related to
other asset-backed securities held as available-for-sale investment securities that were sold during the year. For the years
ended November 30, 2009, 2008 and 2007, we recorded other-than-temporary impairment in our investment in the
asset-backed commercial paper notes of Golden Key U.S. LLC, of $8.2 million, $49.1 million and $11.4 million,
respectively. The loss on investment securities for 2008 and 2007 was mainly comprised of the other-than-temporary
impairment recorded for these notes. In the fourth quarter of 2009, we recorded an unrealized gain of $7.5 million
related to these notes through other comprehensive income. See additional information on other-than-temporary-
impairments recorded in our consolidated statements of income in Note 4: Investment Securities.
Antitrust Litigation Settlement
Amounts received in conjunction with the Visa and MasterCard antitrust litigation settlement, including related interest,
are recorded in this line item when earned. We received $1.9 billion in 2009 from Visa as payment for its portion of the
settlement and a total of $4.2 million in related interest income. In 2008, we received $0.9 billion from MasterCard as
payment for its portion of the settlement. See additional information in “– Liquidity and Capital Resources – Special
Dividend and Settlement of Visa and MasterCard Antitrust Litigation.” We entered into an agreement with Morgan
Stanley at the time of our spin-off to give us sole control over the investigation, prosecution and resolution of the litigation
and to determine how proceeds from the litigation would be shared. The matter is a subject of litigation between the
parties. See “Legal Proceedings” for additional background and recent developments related to this litigation.
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