Discover 2011 Annual Report Download - page 36

24
The Credit Card Accountability Responsibility and Disclosure Act of 2009 restricts our business practices and negatively
impacts our results of operations.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act") has required us to make
fundamental changes to many of our business practices, including marketing, underwriting, pricing and billing. The CARD
Act's restrictions on our ability to increase interest rates on existing balances to respond to market conditions and credit risk
ultimately limits our ability to extend credit to new customers and provide additional credit to current customers. Other CARD
Act restrictions with respect to allocation of payments on accounts and adjustments to interest rates have resulted and will
continue to result in reduced interest income. We rely heavily on interest income. Our interest income from credit card loans
was $5.7 billion for the 2011 fiscal year, which was 80% of revenues (defined as net interest income plus other income),
compared to $5.8 billion in the 2010 fiscal year, which was 88% of revenues. The CARD Act's restrictions on late and other
penalty fees have reduced our loan fee income and may impact our ability to deter late payments. Our loan fee income was
$338 million for the 2011 fiscal year, compared to $340 million in the 2010 fiscal year, which was 5% of revenues in each year.
We have made changes to our pricing, credit and marketing practices designed to lessen the impact of the changes
required by the CARD Act. The long-term impact of the CARD Act on credit card industry profitability generally, and on our
business practices and revenues, continue to depend upon consumer behavior and the actions of our competitors, which remain
difficult to predict. Consumers may generally choose to use credit cards less frequently or for smaller dollar amounts. We may
have to reconsider certain strategies in order to remain competitive. For example, in the event of another market downturn, we
may have to consider expense-reduction initiatives in order to offset our inability to generate increased interest and fee income
due to the CARD Act's repricing restrictions. If the changes we have made and may make in the future to offset the impact of
the CARD Act are not effective in the long term, they may have a material adverse effect on our business and results of
operations.
We face competition from other consumer financial services providers, and we may not be able to compete effectively, which
could result in fewer customers and lower account balances and could materially adversely affect our financial condition,
cash flows and results of operations.
The consumer financial services business is highly competitive. We compete with other consumer financial services
providers on the basis of a number of factors, including brand, reputation, customer service, product offerings, incentives,
pricing and other terms. Competition in credit cards is also based on merchant acceptance and the value provided to the
customer by rewards programs. Many credit card issuers have instituted rewards programs that are similar to ours, and, in some
cases, are more attractive to customers than our programs. These competitive factors affect our ability to attract and retain
customers, increase usage of our products, and maximize the revenue generated by our products. In addition, because most
domestically issued credit cards, other than those issued by American Express, are issued on the Visa and MasterCard
networks, most other card issuers benefit from the dominant position and marketing and pricing power of Visa and MasterCard.
If we are unable to compete successfully, or if competing successfully requires us to take aggressive actions in response to
competitors' actions, our financial condition, cash flows and results of operations could be materially adversely affected.
We incur considerable expenses in competing with other consumer financial services providers, and many of our
competitors have greater financial resources than we do, which may place us at a competitive disadvantage and negatively
affect our financial results.
We incur considerable expenses in competing with other consumer financial services providers to attract and retain
customers and increase usage of our products. A substantial portion of these expenses relates to marketing expenditures. We
incurred expenses of $537 million and $463 million in the 2011 and 2010 fiscal years, respectively, for marketing and business
development. Our consumer financial services products compete primarily on the basis of pricing, terms and service. Because
of the highly competitive nature of the credit card issuing business, a primary method of competition among credit card issuers,
including us, has been to offer rewards programs, low introductory interest rates, attractive standard purchase rates and balance
transfer programs that offer a favorable annual percentage rate or other financial incentives for a specified length of time on
account balances transferred from another credit card. This type of competition has adversely affected credit card yields, and
customers may frequently switch credit cards or transfer their balances to another card. There can be no assurance that any of
the expenses we incur or incentives we offer to attempt to acquire and maintain accounts and increase usage of our products
will be effective.
Furthermore, many of our competitors are larger than we are, have greater financial resources than we do, have more
breadth in consumer banking products, and/or have lower funding and operating costs than we have and expect to have, and
have assets such as branch locations and co-brand relationships, that may help them compete more effectively. We may be at a
competitive disadvantage as a result of the greater financial resources, diversification and scale of many of our competitors.
Table of Contents