Discover 2011 Annual Report Download - page 152

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of amounts already paid to the merchant for payment card transactions. If the Discover Network is unable to collect the amount
subject to dispute from the merchant or merchant acquirer (e.g., in the event of merchant default or dissolution) or after
expiration of the time period for chargebacks in the applicable agreement, the Discover Network will bear the loss for the
amount credited or refunded to the customer. In most instances, a loss by the Discover Network is unlikely to arise in
connection with payments on card transactions because most products or services are delivered when purchased, and credits are
issued by merchants on returned items in a timely fashion, thus minimizing the likelihood of cardholder disputes with respect to
amounts paid by the Discover Network. However, where the product or service is not scheduled to be provided to the customer
until a later date following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases.
The maximum potential amount of obligations of the Discover Network arising as a result of such contingent obligations
is estimated to be the portion of the total Discover Network transaction volume processed to date for which timely and valid
disputes may be raised under applicable law and relevant issuer and customer agreements. There is no limitation on the
maximum amount the Company may be liable to pay to issuers. However, the Company believes that such amount is not
representative of the Company’s actual potential loss exposure based on the Company’s historical experience. The actual
amount of the potential exposure cannot be quantified as the Company cannot determine whether the current or cumulative
transaction volumes may include or result in disputed transactions.
The table below summarizes certain information regarding merchant chargebacks guarantees:
Losses related to merchant chargebacks (in thousands)
Aggregate sales transaction volume (in millions)(1)
For the Year Ended November 30,
2011
$ 1,585
$ 108,225
2010
$ 2,331
$ 99,838
2009
$ 5,836
$ 93,257
(1) Represents period transactions processed on the Discover Network to which a potential liability exists which, in aggregate, can differ from credit card
sales volume.
The Company has not recorded any contingent liability in the consolidated financial statements for merchant chargeback
guarantees on November 30, 2011 and November 30, 2010. The Company mitigates the risk of potential loss exposure by
withholding settlement from merchants, obtaining third party guarantees, or obtaining escrow deposits or letters of credit from
certain merchant acquirers or merchants that are considered higher risk due to various factors such as time delays in the
delivery of products or services. The table below provides information regarding settlement withholdings and escrow deposits,
which are recorded in interest-bearing deposit accounts, and accrued expenses and other liabilities on the Company’s
consolidated statements of financial condition (dollars in thousands):
Settlement withholdings and escrow deposits
November 30,
2011
$ 24,297
November 30,
2010
$ 30,483
21. Litigation and Regulatory Matters
In the normal course of business, from time to time, the Company has been named as a defendant in various legal
actions, including arbitrations, class actions, and other litigation, arising in connection with its activities. Certain of the actual
or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate
amounts of damages. The Company contests liability and/or the amount of damages as appropriate in each pending matter. In
accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory matters
when those matters present loss contingencies which are both probable and estimable. In such cases, there may be an exposure
to loss in excess of any amounts accrued. The Company believes the estimate of the aggregate range of reasonably possible
losses (meaning those losses the likelihood of which is more than remote but less than likely) in excess of the amounts that the
Company has accrued for legal and regulatory proceedings is up to $100 million. This estimated range of reasonably possible
losses is based upon currently available information for those proceedings in which the Company is involved, takes into
account the Company’s best estimate of such losses for those matters for which an estimate can be made, and does not
represent the Company’s maximum potential loss exposure. Various aspects of the legal proceedings underlying the estimated
range will change from time to time and actual results may vary significantly from the estimate. Moreover, the Company has
been notified of a threatened enforcement action brought by the FDIC and the Consumer Financial Protection Bureau ("CFPB")
discussed below. As to that matter, which is not included in the estimate discussed above, the Company is not able to estimate a
reasonably possible range of losses given that, among other factors, the CFPB is a new agency for which no precedent has been
established for enforcement matters. The exposure to loss for this matter could materially exceed the estimate discussed above,
which could have a material adverse impact on the Company's near-term net income; however, the Company does not believe it
would have a material adverse impact on the Company's consolidated capital position.
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