Discover 2014 Annual Report Download - page 155

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counterparty exposures, and management believes that the probability of any payments under these arrangements is
low.
The Company also retains counterparty exposure for the obligations of Diners Club licensees that participate in
the Citishare network, an electronic funds processing network. Through the Citishare network, Diners Club customers
are able to access certain ATMs directly connected to the Citishare network. The Company’s maximum potential future
payment under this counterparty exposure is limited to $15 million, subject to annual adjustment based on actual
transaction experience. However, as of December 31, 2014, the Company had not recorded any contingent liability in
the consolidated financial statements related to this counterparty exposure, and management believes that the
probability of any payments under this arrangement is low.
Merchant Chargeback Guarantees
The Company operates the Discover Network, issues payment cards and permits third parties to issue payment
cards. The Company is contingently liable for certain transactions processed on the Discover Network in the event of a
dispute between the payment card customer and a merchant. The contingent liability arises if the disputed transaction
involves a merchant or merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is
resolved in the customer’s favor, the Discover Network will credit or refund the disputed amount to the Discover
Network card issuer, who in turn credits its customer’s account. The Discover Network will then charge back the
disputed amount of the payment card transaction to the merchant or merchant acquirer, where permitted by the
applicable agreement, to seek recovery of amounts already paid to the merchant for payment card transactions. If the
Discover Network is unable to collect the amount subject to dispute from the merchant or merchant acquirer (e.g., in the
event of merchant default or dissolution) or after expiration of the time period for chargebacks in the applicable
agreement, the Discover Network will bear the loss for the amount credited or refunded to the customer. In most
instances, a loss by the Discover Network is unlikely to arise in connection with payments on card transactions because
most products or services are delivered when purchased, and credits are issued by merchants on returned items in a
timely fashion, thus minimizing the likelihood of cardholder disputes with respect to amounts paid by the Discover
Network. However, where the product or service is not scheduled to be provided to the customer until a later date
following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases. Losses
related to merchant chargebacks were not material for the calendar years ended December 31, 2014 and 2013, fiscal
year ended November 30, 2012 and one month ended December 31, 2012.
The maximum potential amount of obligations of the Discover Network arising as a result of such contingent
obligations is estimated to be the portion of the total Discover Network transaction volume processed to date for which
timely and valid disputes may be raised under applicable law and relevant issuer and customer agreements. There is no
limitation on the maximum amount the Company may be liable to pay to issuers. However, the Company believes that
such amount is not representative of the Company’s actual potential loss exposure based on the Company’s historical
experience. The actual amount of the potential exposure cannot be quantified as the Company cannot determine
whether the current or cumulative transaction volumes may include or result in disputed transactions.
The table below summarizes certain information regarding merchant chargeback guarantees (in millions):
For the Calendar Years Ended
December 31, For the Fiscal
Year Ended
November 30,
2012
For the One
Month Ended
December 31,
2012
2014 2013
Aggregate sales transaction volume(1) ....................................................... $ 125,637 $ 120,442 $ 114,847 $ 11,521
(1) Represents period transactions processed on the Discover Network for which a potential liability exists that, in aggregate, can differ from credit card sales volume.
The Company did not record any contingent liability in the consolidated financial statements for merchant
chargeback guarantees on December 31, 2014 and 2013. The Company mitigates the risk of potential loss exposure
by withholding settlement from merchants, obtaining third-party guarantees, or obtaining escrow deposits or letters of
credit from certain merchant acquirers or merchants that are considered higher risk due to various factors such as time
delays in the delivery of products or services.