Discover 2011 Annual Report Download - page 17

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Credit Risk Management
Credit risk management is a critical component of our management and growth strategy. Credit risk refers to the risk of
loss arising from borrower default when borrowers are unable or unwilling to meet their financial obligations to us. Our credit
risk is generally highly diversified across millions of accounts without significant individual exposures. We manage risk
primarily according to customer segments and product types. See “- Risk Management” for more information regarding how
we define and manage our credit and other risks.
Account Acquisition (New Customers)
We acquire new credit card customers through our marketing efforts, including direct mail, internet, media advertising
and merchant relationships, or through unsolicited individual applications. We also use targeted marketing efforts to
prospective student loan and personal loan customers, although student loan customers may also submit unsolicited individual
applications. In all cases, we believe that we have a rigorous process for screening applicants.
To identify credit-worthy prospective customers, our credit risk management team uses proprietary targeting and
analytical models and our marketing team matches them with our product offerings. We consider the prospective customer's
financial stability, as well as ability and willingness to pay. In order to make the best use of our resources to acquire new
accounts, we seek production efficiencies, conduct creative testing and aim to continuously improve our product offerings and
enhance our targeting and analytical models.
We assess the creditworthiness of each consumer loan applicant through our underwriting process. We evaluate
prospective customers' applications using credit information provided by the credit bureaus and other sources. We use credit
scoring systems, both externally developed and proprietary, to evaluate consumer and credit bureau data. When appropriate, we
also use experienced credit underwriters to supplement our automated decision-making processes.
Upon approval of a customer's application, we assign a specific annual percentage rate (“APR”) using an analytical
pricing strategy that provides competitive pricing for customers and seeks to maximize revenue on a risk-adjusted basis. For
our credit card loans, we also assign a revolving credit line based on risk level and income.
Portfolio Management (Existing Customers)
The revolving nature of our credit card loans requires that we regularly assess the credit risk exposure of such accounts.
This assessment reflects information relating to the performance of the individual's Discover account as well as information
from credit bureaus relating to the customer's broader credit performance. We utilize statistical evaluation models to support the
measurement and management of credit risk. At the individual customer level, we use custom risk models together with generic
industry models as an integral part of the credit decision-making process. Depending on the duration of the customer's account,
risk profile and other performance metrics, the account may be subject to a range of account management treatments, including
limits on transaction authorization and increases or decreases in purchase and cash credit limits. Our installment loans are billed
according to an amortization schedule that is fixed at the time of the disbursement of the loan.
Customer Assistance
We provide our customers with a variety of tools to proactively manage their accounts, including electronic payment
reminders and a website dedicated to customer education, as further discussed under the heading "-Customer Service." These
tools are designed to limit a customer's risk of becoming delinquent. When a customer's account becomes delinquent or is at
risk of becoming delinquent, we employ a variety of strategies to assist customers in becoming current on their accounts.
All monthly billing statements of accounts with past due amounts include a request for payment of such amounts.
Customer assistance personnel generally initiate contact with customers within 30 days after any portion of their balance
becomes past due. The nature and the timing of the initial contact, typically a personal call or letter, are determined by a review
of the customer's prior account activity and payment habits.
We re-evaluate our collection efforts and consider the implementation of other techniques, including internal collection
activities and use of external vendors, as a customer becomes increasingly delinquent. We limit our exposure to delinquencies
through controls within our process for authorizing transactions and credit limits and criteria-based account suspension and
revocation. In situations involving customers with financial difficulties, we may enter into arrangements to extend or otherwise
change payment schedules, lower interest rates and/or waive fees to aid customers in becoming current on their obligations to
us.
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