Discover 2011 Annual Report Download - page 44

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adversely affected by factors outside of our control, including competitors' actions and legislative/regulatory changes. The
CARD Act limits pricing changes that may impact an account throughout its lifecycle, which may reduce our capability to offer
lower price promotions to drive account usage and customer engagement. As part of our strategy to increase usage, we have
been increasing the number of merchants who accept cards issued on the Discover Network. If we are unable to continue
increasing merchant acceptance or fail to improve awareness of existing merchant acceptance of our cards, our ability to grow
usage of Discover cards may be hampered. As a result of these factors, we may be unable to increase or sustain credit card
usage, which could impair growth in or lead to diminishing average balances and total revenue.
Our transaction volume is concentrated among large merchants, and a reduction in the number of, or rates paid by, large
merchants that accept cards on the Discover Network or PULSE network could materially adversely affect our business,
financial condition, results of operations and cash flows.
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. Transaction volume on the PULSE network was also
concentrated among the top 100 merchants in 2011, with our largest merchant accounting for approximately 13% of PULSE
transaction volume. These merchants could seek to negotiate better pricing or other financial incentives by continuing to
participate in the Discover Network and/or PULSE network only on the condition that we change the terms of their economic
participation. Loss of acceptance at our largest merchants would decrease transaction volume, negatively impact our brand, and
could cause customer attrition. At the same time, we are subject to pricing pressure from third-party issuers, who generally
have a greater ability than merchants to negotiate higher interchange fees. In addition, some of our merchants, primarily our
remaining small and mid-size merchants, are not contractually committed to us for any period of time and may cease to
participate in the Discover Network at any time on short notice.
Actual and perceived limitations on acceptance of credit cards issued on the Discover Network or debit cards issued on
the PULSE network could adversely affect the use of Discover cards by existing customers, the attractiveness of the Discover
card to prospective new customers and the interest of other financial institutions in issuing cards on the Discover Network or
the PULSE network. We may have difficulty attracting and retaining third-party issuers if we are unable to add and retain
acquirers or merchants who accept cards issued on the Discover or PULSE networks. As a result of these factors, a reduction in
the number of, or rates paid by, our merchants could materially adversely affect our business, financial condition, results of
operations and cash flows.
We may be unable to grow earnings if we are unable to increase or maintain the number of small and mid-size merchants
that participate in the Discover Network.
In order to expand our merchant acceptance among small and mid-size merchants, we have been entering into
agreements with and have been using third-party acquirers and processors to add merchants to the Discover Network and
accept and process payments for these merchants on an integrated basis with Visa and MasterCard payments. This strategy
could result in decreased revenues, higher expenses, degraded service and signage placement levels and retaliatory responses
from competitors. There can be no assurance that the use of third-party acquirers and processors will continue to increase
merchant acceptance among small or mid-size merchants, or that such third-party acquirers will continue to work with us. If we
are unable to continue to increase or maintain small and mid-size merchant acceptance, our competitive position and our ability
to grow earnings could be adversely affected.
Our business, financial condition and results of operations may be adversely affected by the increasing focus of merchants
on the fees charged by credit card and debit card networks.
Merchant acceptance and fees are critical to the success of both our card issuing and payment processing businesses.
Merchants are concerned with the fees charged by credit card and debit card networks. They seek to negotiate better pricing or
other financial incentives as a condition to continued participation in the Discover Network and PULSE network. During the
past few years, merchants and their trade groups have filed numerous lawsuits against Visa, MasterCard, American Express and
their card-issuing banks, claiming that their practices toward merchants, including interchange fees, violate federal antitrust
laws. There can be no assurance that they will not in the future bring legal proceedings against other credit card and debit card
issuers and networks, including us. Merchants also may promote forms of payment with lower fees, such as ACH-based
payments, or seek to impose surcharges at the point of sale for use of credit or debit cards. Merchant groups have also promoted
federal and state legislation that would restrict issuer practices or enhance the ability of merchants, individually or collectively,
to negotiate more favorable fees. The heightened focus by merchants on the fees charged by credit card and debit card
networks, together with the Reform Act and recent U.S. Department of Justice settlements with Visa and MasterCard, which
would allow merchants to encourage customers to use other payment methods or cards, could lead to reduced transactions on,
or merchant acceptance of, Discover Network or PULSE network cards or reduced fees, either of which could adversely affect
our business, financial condition and results of operations.
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