Discover 2014 Annual Report Download - page 51

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Our transaction volume is concentrated among large merchants, and a reduction in the number of large merchants
that accept cards on the Discover Network or PULSE network or the rates they pay 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 2014, 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 2014, with our largest merchant accounting for approximately 11%
of PULSE transaction volume. These merchants could seek to negotiate better pricing or other financial incentives by
conditioning their continued participation in the Discover Network and/or PULSE network on a change in 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. 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 or 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 and the
attractiveness of the Discover card to prospective customers. Also, we may have difficulty attracting and retaining
network partners if we are unable to add or 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 our merchants or the rates they pay could
materially adversely affect our business, financial condition, results of operations and cash flows.
Our business, financial condition and results of operations may be adversely affected by merchants’ increasing focus
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 of 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 issuer 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 Dodd-
Frank 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 and may increase merchant surcharging, could lead to
reduced transactions on, or merchant acceptance of, Discover Network or PULSE network cards or reduced fees, any of
which could adversely affect our business, financial condition and results of operations.
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
primarily on 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 and card activity
and our resulting revenue. Overall network and card 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 have been increasing and we incurred losses of $134 million and