Discover 2011 Annual Report Download - page 38

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The success of our Diners Club business depends upon our ability to maintain the full operability of the Diners Club
network for existing Diners Club cardholders, network licensees and merchants. Citigroup owns and operates network licensees
generating a significant share of the Diners Club network sales volume. Citigroup has been reducing assets outside its core
businesses, including certain Diners Club businesses, by selling its ownership interest. If Citigroup were to discontinue its
support of a significant number of or key Diners Club network licensees, we may face difficulty maintaining and growing our
international network. This could adversely affect the acceptance of Discover cards when they are used outside of North
America.
The success of our Diners Club business depends upon the cooperation and support of the network licensees that issue
Diners Club cards and that maintain a merchant acceptance network. As is the case for other card payment networks, Diners
Club does not issue cards or determine the terms and conditions of cards issued by the network licensees. This is the
responsibility of each licensee. Further, unlike the Discover Network, we have only a small number of direct merchant
relationships in the Diners Club network. Instead, we rely on network licensees located outside the United States to help us
sustain and grow our international business. As a result of a number of factors, including any difficulties in achieving full card
acceptance across our networks, network licensees may choose not to renew the license agreements with us when their terms
expire. In addition, the increasingly competitive marketplace for cross-border issuance and acceptance of credit cards may
result in lower participation fees for the Diners Club network. In addition, many of the merchants in the acceptance network,
primarily small and mid-size merchants, may not be contractually committed to the network licensees for any period of time
and may cease to participate in the Diners Club network at any time on short notice. If we are unable to continue our
relationships with network licensees or if the network licensees are unable to continue their relationships with merchants, our
ability to maintain or increase revenues and to remain competitive would be adversely affected. Interruption of these
relationships might also have an adverse effect on the acceptance of Discover cards when they are used on the Diners Club
network outside of North America.
We rely upon numerous other network partners for merchant acceptance for existing Diners Club customers. We
completed rerouting merchant transactions for foreign Diners Club cards transacting in North America from the MasterCard
acceptance network to the Discover Network in 2011. If we are unable to continue to offer acceptable North American
merchant acceptance to Diners Club customers, we may experience decreased transaction volume, which would reduce our
revenues. Also, as we have nonamortizable intangible assets that resulted from the purchase of Diners Club, if we are unable to
maintain or increase revenues due to the reasons described above, we may be exposed to an impairment loss that, when
recognized, could have a material adverse impact on our consolidated financial condition and results of operations. The long-
term success of our acquisition of Diners Club depends upon achieving full card acceptance across our networks, which could
include higher overall costs or longer timeframes than anticipated. If we are unable to successfully achieve full card acceptance
across our networks, we may be unable to achieve the synergies we anticipate and to grow our business internationally.
The success of our student loan strategy depends upon our ability to fully integrate The Student Loan Corporation. If we
fail to do so, we may be unable to sustain and grow our student loan portfolio.
In December 2010, we purchased SLC and, in September 2011, we purchased additional private student loans from Citi.
The acquisitions significantly increased the size of our private student loan portfolio, which has grown from $1.0 billion at
November 30, 2010 to $7.3 billion at November 30, 2011. The success of these acquisitions depends, in part, upon our ability
to manage the risks resulting from our relatively recent entry into the student loan market.
We are relying heavily on the assistance of Citi and certain of its affiliates during a transition period for many services,
including services related to operations, technology, marketing and origination. If we are unable to assume responsibility for
these services during the established transition period, we will need to enter into an extension of our agreement with Citi or
identify other service providers, which may not be available on favorable pricing or terms, if at all. If we were to lose the
support of Citi before these services were successfully transitioned to our employees or another service provider, we could
experience interruptions in operations that could negatively impact our ability to meet customer demand for student loan
originations and disbursements, damage our relationships with schools, customers and vendors, and reduce our market share in
the student loan market, all of which could adversely affect our student loan strategy and results of operations.
The long-term success of our student loan strategy depends upon our ability to manage the credit risk, pricing, funding,
operations and expenses of a larger student loan portfolio as well as the successful implementation of our brand strategy. We
currently originate student loans under the Discover brand and acquire student loans from Citi that are marketed under the
CitiAssist brand; however, our agreement with Citi regarding CitiAssist student loans is expected to expire at the end of 2012.
In the 2011 fiscal year, 57% of our newly-disbursed private student loans were originated by Citi under the CitiAssist brand.
Our ability to maintain or increase market share is largely dependent upon our ability to migrate to a single, cohesive suite of
student loan products marketed under the Discover brand, as well as our ability to communicate effectively to prospective
borrowers and schools about these products. We plan to continue to offer competitively priced products by managing our
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