Discover 2011 Annual Report Download - page 110

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Discount and Interchange Revenue. The Company earns discount revenue from fees charged to merchants with whom
the Company has entered into card acceptance agreements for processing credit card purchase transactions. Discover card
transaction volume was concentrated among the Company's top 100 merchants in 2011, with its largest merchant accounting
for approximately 8% of that transaction volume. We earn acquirer interchange revenue from merchant acquirers on all
Discover Network card transactions and certain Diners Club transactions made by credit card customers at merchants with
whom merchant acquirers have entered into card acceptance agreements for processing credit card purchase transactions. The
Company pays issuer interchange to third-party card issuers who have entered into contractual arrangements to issue cards on
the Company's networks as compensation for risk and other operating costs. The discount revenue or acquirer interchange is
recognized as revenue, net of any associated issuer interchange cost, at the time the transaction is captured.
Customer Rewards. The Company offers its customers various reward programs, including the Cashback Bonus reward
program, pursuant to which the Company pays certain customers a reward equal to a percentage of their credit card purchase
amounts based on the type and volume of the customer's purchases. The liability for customer rewards, which is included in
accrued expenses and other liabilities on the consolidated statements of financial condition, is estimated on an individual
customer basis and is accumulated as qualified customers make progress toward earning the reward through their ongoing
credit card purchase activity. In determining the appropriate liability for customer rewards, the Company estimates forfeitures
of rewards accumulated but not redeemed based on historical account closure and charge-off experience, actual customer credit
card purchase activity and the terms of the rewards program. In accordance with ASC Subtopic 605-50, Revenue Recognition:
Customer Payments and Incentives (“ASC 605-50”), the Company recognizes customer rewards cost as a reduction of the
related revenue. For the years ended November 30, 2011, 2010 and 2009, rewards costs, adjusted for estimated forfeitures,
amounted to $879.0 million, $737.8 million, and $669.5 million, respectively. At November 30, 2011 and 2010, the liability for
customer rewards, adjusted for estimated forfeitures, was $1.0 billion and $912.3 million, respectively, which is included in
accrued expenses and other liabilities on the consolidated statement of financial condition.
Fee Products. The Company earns revenue related to fees received for marketing products or services that are ancillary
to the Company's credit card and personal loans, including payment protection products and identity theft protection services,
to the Company's customers. The amount of revenue recorded is based on the terms of the agreements and contracts with the
third parties that provide these services. The Company recognizes this income over the customer agreement or contract period
as earned.
Transaction Processing Revenue. Transaction processing revenue represents fees charged to financial institutions and
merchants for processing ATM, debit and point-of-sale transactions over the PULSE network and is recognized at the time the
transactions are processed. Transaction processing revenue also includes network participant revenue earned by PULSE related
to fees charged for maintenance, support, information processing and other services provided to financial institutions,
processors and other participants in the PULSE network. These revenues are recognized in the period that the related
transactions occur or services are rendered.
Royalty and Licensee Revenue. The Company earns revenue from licensing fees for granting the right to use the Diners
Club brand and processing fees for providing various services to Diners Club licensees, which we refer to together as royalty
and licensee revenue. Royalty revenue is recognized in the period that the cardholder volume used to calculate the royalty fee is
generated. Processing fees are recognized in the month that the services are provided. Royalty and licensee revenue is included
in other income on the consolidated statements of income.
Incentive Payments. The Company makes certain incentive payments under contractual arrangements with financial
institutions, Diners Club licensees, merchants and certain other customers. In accordance with ASC Topic 605-50, payments to
customers are generally classified as contra-revenue unless a specifically identifiable benefit is received by the Company in
consideration for the payment and the fair value of such benefit is reasonably estimable and measurable. If no such benefit is
identified, then the entire payment is classified as contra-revenue, and included in other income in the consolidated statements
of income in the line item where the related revenues are recorded. If the payment gives rise to an asset because it is expected
to directly or indirectly contribute to future net cash inflows, it is deferred and recognized over the expected benefit period. The
unamortized portion of the deferred incentive payments included in other assets on the consolidated statements of financial
condition was $41.1 million and $45.8 million at November 30, 2011 and 2010, respectively.
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