Discover 2014 Annual Report Download - page 52

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$110 million for the years ended December 31, 2014 and 2013, 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 continues to increase for
the financial services industry in general. Additionally, our risk of fraud continues to increase as acceptance of the
Discover card grows internationally and we expand our direct banking 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 these changes.
Technological changes continue to significantly impact the financial services and payment services industries,
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. For example, the industry migration to evolving
security (referred to as “EMV”) standards in 2015 will be a fundamental change in how payment transactions are
processed and how customers use their cards. There are significant risks in migrating to EMV standards, including
merchant acceptance, consumer adoption and technology issues, which may have adverse implications for both our
card-issuing and network businesses. The introduction of EMV standards requires changes to our payment systems to
permit interoperability among our networks, both domestically and globally. The U.S. payments industry is expected to
bring risks and opportunities in 2015 for both our card-issuing and payments businesses in EMV migration as well as
increasingly competitive mobile, e-wallet and tokenization solutions.
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. Rapidly evolving technologies and new
entrants in mobile and emerging payments pose a risk to Discover both as a card issuer and to the payments business.
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 while also managing our expenses, 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. For example, we
depend on third parties for software and systems development, the timely transmission of information across our data
transportation network, and for other telecommunications, processing, remittance, technology-related and other 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 for poor vendor oversight. 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.