Discover 2011 Annual Report Download - page 86

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Fee Products
We earn revenue related to fees received for selling ancillary products and services, including payment protection and
identity theft protection services, to customers. The amount of revenue recorded is generally based on either a percentage of a
customer's outstanding balance or a flat fee and is recognized as earned. Fee products income increased for the year ended
November 30, 2011 as compared to the year ended 2010 primarily due to lower chargeoffs related to these products.
Fee products income increased slightly for the year ended November 30, 2010, as compared to the year ended
November 30, 2009 on a non-GAAP as-adjusted basis primarily due to an increase in revenue from our identity theft protection
product.
Loan Fee Income
Loan fee income consists primarily of fees on credit card loans and includes late, overlimit, cash advance, pay-by-phone
and other miscellaneous fees. However, as a result of legislative changes that became effective in 2010, we no longer charge
overlimit or pay-by-phone fees on consumer credit card loans and additional legislative changes also resulted in modifications
to our late fee policy beginning August 2010.
Loan fee income was flat for the year ended November 30, 2011 as compared to the year ended November 30, 2010.
Although late fees decreased in 2011 due to the modifications discussed above, this was offset by higher overlimit fees in 2011
as there was a heightened amount of overlimit fee charge-offs in 2010. Although there was no material income relating to
overlimit fees during 2011, there was a significant amount of overlimit fees that were delinquent in February 2010 and were
subsequently charged off. In 2010, loan fee income decreased substantially as compared to 2009 on a non-GAAP as-adjusted
basis, primarily due to the legislative changes mentioned above. We had a minimal level of overlimit fees in 2010 as compared
to $82 million in 2009 on a non-GAAP as-adjusted basis, which was the last year in which we charged overlimit fees
throughout the entire year (overlimit fees were $44 million in 2009 on a GAAP basis). Additionally, our late fee income
declined by $45 million in 2010 as compared to 2009 on a non-GAAP as-adjusted basis. This was due in part to the legislative
changes mentioned above, but also due to a higher level of late payment incidences in 2009 as a result of the credit
environment at that time.
Merchant Fees
To broaden merchant acceptance of Discover Network cards, we began outsourcing our acquisition and servicing of
small and mid-sized merchants to merchant acquiring organizations in late 2006. We have also sold small and mid-size
merchant portfolios to third-party acquirers to facilitate integrated servicing and to reduce costs. As we have moved away from
direct merchant relationships, our merchant fee income and related costs have declined to $16 million in 2011 as compared to
$28 million in 2010 and $44 million in 2009. The lower income per transaction is generally offset by increased volume due to
broader acceptance.
Transaction Processing Revenue
Transaction processing revenue represents switch fees charged to financial institutions and merchants for processing
ATM, debit and point-of-sale transactions over the PULSE network, as well as various participation and membership fees.
Switch fees are charged on a per transaction basis. Transaction processing revenue increased for 2011 as compared to 2010, as
well as for 2010 compared to 2009, primarily due to continued higher transaction volumes at PULSE partially offset by
increased business development costs.
Gain (Loss) on Investments
Gain (loss) on investment securities includes realized gains and losses on the sale of investments as well as any write-
downs of investment securities to fair value when the decline in fair value is considered other than temporary. Gain (loss) on
investment securities in 2010 included a gain of $19.6 million which related to the liquidation of collateral supporting the asset-
backed commercial paper notes of Golden Key. There was not a similar benefit recognized in 2011 or 2009.
Other Income
Other income includes royalty revenues earned by Diners Club, revenue from the transition service agreements related to
the acquisition of SLC, revenue from merchants related to reward programs, revenues from third-party issuers and other
miscellaneous revenue items.
Other income increased for the year ended November 30, 2011 as compared to November 30, 2010 due to the
acquisition of SLC in the first quarter of 2011 which resulted in the inclusion of transition service agreement revenue totaling
$27 million as well as a bargain purchase gain of $7 million. For the year ended November 30, 2011 other income included a
$5 million gain relating to fair value adjustments on our loans held for sale as compared to a $23 million loss related to the
initial write down of those same loans during the year ended November 30, 2010.
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