Discover 2011 Annual Report Download - page 37

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Our expenses directly affect our earnings results. Many factors can influence the amount of our expenses, as well as how
quickly they may increase. Our ongoing investments in infrastructure, which may be necessary to maintain a competitive
business, integrate newly-acquired businesses, and establish scalable operations, may increase our expenses. In addition, as our
business develops, changes or expands, additional expenses can arise as a result of a reevaluation of business strategies,
management of outsourced services, asset purchases, structural reorganization, compliance with new laws or regulations or the
integration of newly-acquired businesses. If we are unable to successfully manage our expenses, our financial results will be
negatively affected.
We face competition from other operators of payment networks, and we may not be able to compete effectively, which could
result in reduced transaction volume, limited merchant acceptance of our cards, limited issuance of cards on our networks
by third parties and materially reduced earnings.
We face substantial and increasingly intense competition in the payments industry. We compete with other payment
networks to attract third-party issuers to issue credit and debit cards and other card products on the Discover, PULSE and
Diners Club networks. Competition with other operators of payment networks is generally based on issuer interchange fees,
fees paid to networks (including switch fees), merchant acceptance, network functionality and other economic terms.
Competition also is based on customer perception of service quality, brand image, reputation and market share.
Many of our competitors are well established, larger than we are and/or have greater financial resources than we do.
These competitors have provided financial incentives to card issuers, such as large cash signing bonuses for new programs,
funding for and sponsorship of marketing programs and other bonuses. Visa and MasterCard each have been in existence for
more than 40 years and enjoy greater merchant acceptance and broader global brand recognition than we do. Although we have
made progress in merchant acceptance, we have not achieved global market parity with Visa and MasterCard. In addition, Visa
and MasterCard have entered into long-term arrangements with many financial institutions that may have the effect of
discouraging those institutions from issuing credit cards on the Discover Network or issuing debit cards on the PULSE
network. Some of these arrangements are exclusive, or nearly exclusive, which further limits our ability to conduct material
amounts of business with these institutions. If we are unable to remain competitive on issuer interchange and other incentives,
we may be unable to offer adequate pricing to third-party issuers while maintaining sufficient net revenues. At the same time,
increasing the transaction fees charged to merchants or increasing acquirer interchange could adversely affect our effort to
increase merchant acceptance of credit cards issued on the Discover Network and may cause merchant acceptance to decrease.
This, in turn, could adversely affect our ability to attract third-party issuers and our ability to maintain or grow revenues from
our proprietary network. The Reform Act, which gives merchants control of the routing of debit transactions, could also result
in a decrease in volume and revenue for the PULSE network.
American Express is also a strong competitor, with international acceptance, high transaction fees and an upscale brand
image. Internationally, American Express competes in the same market segments as Diners Club. We may face challenges in
increasing international acceptance on our networks, particularly if third parties that we rely on to issue Diners Club cards,
increase card acceptance, and market our brands do not perform to our expectations.
In addition, if we are unable to maintain sufficient network functionality to be competitive with other networks, or if our
competitors develop better data security solutions or more innovative products and services than we do, our ability to attract
third-party issuers and maintain or increase the revenues generated by our proprietary card issuing business may be materially
adversely affected. An inability to compete effectively with other payment networks could result in reduced transaction volume,
limited merchant acceptance of our cards, limited issuance of cards on our network by third parties and materially reduced
earnings.
Our business depends upon relationships with issuers, merchant acquirers and licensees, which are generally financial
institutions. The adverse economic and regulatory environment and increased consolidation in the financial services industry
decrease our opportunities for new business and may result in the termination of existing business relationships if a business
partner is acquired or goes out of business. In addition, as a result of this environment, financial institutions may have
decreased interest in engaging in new card issuance opportunities or expanding existing card issuance relationships, which
would inhibit our ability to grow our payment services business.
If we are unsuccessful in maintaining the Diners Club network and achieving full card acceptance across our networks, we
may be unable to sustain and grow our international network business.
In 2008, we acquired the Diners Club network, brand, trademarks, employees, and license agreements. We have made
significant progress toward, but have not completed, achieving full card acceptance across the Diners Club network, the
Discover Network and PULSE. This would allow Discover customers to use their cards at merchant and ATM locations that
accept Diners Club cards around the world and would allow Diners Club customers to use their cards on the Discover Network
in North America and on the PULSE network both domestically and internationally.
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