Discover 2011 Annual Report Download - page 21

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Discover Network Operations
We support our growing base of merchants through a merchant acquiring model that includes direct relationships with
large merchants in the United States and arrangements with merchant acquirers for small- and mid-size merchants. In addition
to our U.S.-based merchant acceptance locations, Discover Network cards also are accepted at many locations in Canada,
Mexico, the Caribbean, China, Japan and a growing number of countries around the world on the Diners Club network.
We maintain direct relationships with most of our largest merchant accounts, which enables us to benefit from joint
marketing programs and opportunities and to retain the entire discount revenue from the merchant. The terms of our direct
merchant relationships are governed by merchant services agreements. These agreements also are accompanied by additional
program documents that further define our network functionality and requirements, including operating regulations, technical
specifications and dispute rules. To enable ongoing improvements in our network's functionality and in accordance with
industry convention, we publish updates to our program documents on a semi-annual basis. Discover card transaction volume
was concentrated among our top 100 merchants in 2011, with our largest merchant accounting for approximately 8% of that
transaction volume.
In order to increase merchant acceptance, Discover Network has sold the majority of its small and mid-size merchant
portfolios to third-party merchant acquirers to allow them to offer a comprehensive payments processing package to such
merchants. Merchants also can apply to our merchant acquirer partners directly to accept Discover Network cards through the
acquirers' integrated payments solutions. Merchant acquirers provide merchants with consolidated servicing for Discover, Visa
and MasterCard transactions, resulting in streamlined statements and customer service for our merchants, and reduced costs for
us. These acquirer partners also perform credit evaluations and screen applications against unacceptable business types and the
Office of Foreign Asset Control Specifically Designated Nationals list.
Discover Network operates systems and processes that seek to prevent fraud and ensure compliance with our operating
regulations. Our systems evaluate incoming transaction activity to identify abnormalities that require investigation and fraud
mitigation. Designated Discover Network personnel are responsible for validating compliance with our operating regulations
and law, including enforcing our data security standards and prohibitions against internet gambling and other illegal or
otherwise unacceptable activities. Discover Network is a founding and current member of the Payment Card Industry Security
Standards Council, LLC, and generally requires merchants and service providers to comply with the Payment Card Industry
Security Standards Council data security standards.
Technology
We provide technology systems processing through a combination of owned and hosted data centers and the use of third-
party vendors. These data centers support our payment networks, provide customers with access to their accounts, and manage
transaction authorizations, among other functions. Discover Network works with a number of vendors to maintain our
connectivity in support of POS authorizations. This connectivity also enables merchants to receive timely payment for their
Discover Network card transactions.
Our approach to technology development and management involves both third-party and in-house resources. We use
third-party vendors for basic technology services (e.g., telecommunications, hardware and operating systems) as well as for
processing and other services for our direct banking and payment services businesses. We subject each vendor to a formal
approval process to ensure that the vendor can assist us in maintaining a cost-effective and reliable technology platform. We use
our in-house resources to build, maintain and oversee some of our technology systems. We believe this approach enhances our
operations and improves cost efficiencies.
Seasonality
In our credit card business, we experience fluctuations in transaction volumes and the level of loan receivables as a result
of higher seasonal consumer spending and payment patterns around the winter holidays, summer vacations and back-to-school
periods. In our student loan business, our loan disbursements peak at the beginning of a school's academic semester or quarter.
Although there is a seasonal impact to transaction volumes and the level of student and credit card loan receivables, seasonal
trends have not caused significant fluctuations in our results of operations or credit quality metrics between quarterly and
annual periods.
Revenues in our Diners Club business are generally higher in the first half of the year as a result of Diners Club's tiered
pricing system where licensees qualify for lower royalty rate tiers as cumulative volume grows during the course of the year.
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