Discover 2011 Annual Report Download - page 45

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Political, economic or other instability in a country or geographic region, or other unforeseen or catastrophic events, could
adversely affect our international business activities and reduce our revenue.
Natural disasters or other catastrophic events, including terrorist attacks, may have a negative effect on our business and
infrastructure, including our information technology systems. Our Diners Club network, concentrated on primarily serving the
global travel industry, could be adversely affected by international conditions that may result in a decline in consumer or
business travel activity. Armed conflict, public health emergencies, natural disasters or terrorism may have a significant
negative effect on travel activity and related revenue. Although a regionalized event or condition may primarily affect one of
our network participants, it may also affect our overall network activity and our resulting revenue. Overall network transaction
activity may decline as a result of concerns about safety or disease or may be limited because of economic conditions that result
in spending on travel to decline. The impact of such events and other catastrophes on the overall economy may also adversely
affect our financial condition or results of operations.
Fraudulent activity associated with our products or our networks could cause our brands to suffer reputational damage, the
use of our products to decrease and our fraud losses to be materially adversely affected.
We are subject to the risk of fraudulent activity associated with merchants, customers and other third parties handling
customer information. Our fraud losses were $72 million and $44 million for the years ended November 30, 2011 and 2010,
respectively. Credit and debit card fraud, identity theft and related crimes are prevalent and perpetrators are growing ever more
sophisticated. Our resources and fraud prevention tools may be insufficient to accurately predict and prevent fraud. The risk of
fraud is expected to increase as we expand the acceptance of the Discover card internationally and expand our direct-to-
consumer deposit business. Our financial condition, the level of our fraud charge-offs and other results of operations could be
materially adversely affected if fraudulent activity were to significantly increase. High profile fraudulent activity could
negatively impact our brand and reputation. In addition, significant increases in fraudulent activity could lead to regulatory
intervention (such as mandatory card reissuance) and reputational and financial damage to our brands, which could negatively
impact the use of our cards and networks and thereby have a material adverse effect on our business. Further, fraudulent
activity may result in lower license fee revenue from our Diners Club licensees.
The financial services and payment services industries are rapidly evolving, and we may be unsuccessful in introducing new
products or services on a large scale in response to this evolution.
The financial services and payment services industries experience constant and significant technological changes, such
as continuing development of technologies in the areas of smart cards, radio frequency and proximity payment devices,
electronic commerce and mobile commerce, among others. The effect of technological changes on our business is
unpredictable. We depend, in part, on third parties for the development of and access to new technologies. We expect that new
services and technologies relating to the payments business will continue to appear in the market, and these new services and
technologies may be superior to, or render obsolete, the technologies that we currently use in our products and services. As a
result, our future success may be dependent on our ability to identify and adapt to technological changes and evolving industry
standards and to provide payment solutions for our customers, merchants and financial institution customers.
Difficulties or delays in the development, production, testing and marketing of new products or services may be caused
by a number of factors including, among other things, operational, capital and regulatory constraints. The occurrence of such
difficulties may affect the success of our products or services, and developing unsuccessful products and services could result
in financial losses, as well as decreased capital availability. In addition, the new products and services offered may not be
attractive to consumers and merchant and financial institution customers. Also, success of a new product or service may depend
upon our ability to deliver it on a large scale, which may require a significant capital investment that we may not be in a
position to make. If we are unable to successfully introduce and maintain new income-generating products and services, it may
impact our ability to compete effectively and materially adversely affect our business and earnings.
We rely on third parties to deliver services. If we face difficulties managing our relationships with third-party service
providers, our revenue or results of operations could be materially adversely affected.
We depend on third-party service providers for many aspects of the operation of our business. We depend on third parties
for the timely transmission of information across our data transportation network and for other telecommunications, processing,
remittance and technology-related services in connection with our direct banking and payment services businesses. If a service
provider fails to provide the services that we require or expect, or fails to meet contractual requirements, such as service levels
or compliance with applicable laws, the failure could negatively impact our business by adversely affecting our ability to
process customers' transactions in a timely and accurate manner, otherwise hampering our ability to serve our customers, or
subjecting us to litigation and regulatory risk. Such a failure could adversely affect the perception of the reliability of our
networks and services and the quality of our brands, and could materially adversely affect our revenues and/or our results of
operations.
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