Discover 2014 Annual Report Download - page 86

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in temporary and permanent programs are accounted for as troubled debt restructurings. Beginning in first quarter of
2014, loan modifications through external sources are accounted for as troubled debt restructurings.
Borrower performance after using payment programs or forbearance is monitored and we believe the programs
help to prevent defaults and are useful in assisting customers experiencing financial difficulties. We plan to continue to
use payment programs and forbearance and, as a result, we expect to have additional loans classified as troubled debt
restructurings in the future.
Other Income
The following table presents the components of other income for the periods presented (dollars 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 Calendar Year vs.
2013 Calendar Year
(decrease) increase
2013 Calendar Year vs.
2012 Fiscal Year
increase (decrease)
2014 2013 $ % $ %
Discount and interchange
revenue(1) ....................... $ 979 $ 1,126 $ 1,035 $ 82 $ (147) (13)% $ 91 9 %
Protection products ........... 314 350 409 33 (36) (10)% (59) (14)%
Loan fee income ............... 334 320 325 29 14 4 % (5) (2)%
Transaction processing
revenue.......................... 182 192 218 18 (10) (5)% (26) (12)%
Gain on investments.......... 4 5 26 2 (1) (20)% (21) (81)%
Gain on origination and
sale of mortgage loans .... 81 144 105 17 (63) (44)% 39 37 %
Other income ................... 121 169 163 19 (48) (28)% 6 4 %
Total other income ........ $ 2,015 $ 2,306 $ 2,281 $ 200 $ (291) (13)% $ 25 1 %
(1) Net of rewards, including Cashback Bonus rewards, of $1.4 billion, $1.0 billion, $1.0 billion and $123 million for the calendar years ended December 31, 2014
and 2013, fiscal year ended November 30, 2012 and one month ended December 31, 2012, respectively. During the three months ended December 31, 2014, we
made certain changes to its customer rewards program, eliminating forfeitures. These changes resulted in a one-time expense of $178 million due to the reversal of
the estimate for customer rewards forfeiture, a contra-account to accrued expenses and other liabilities. Actual forfeitures resulted in additional discount and
interchange revenue and total other income of $36 million each for the calendar years ended December 31, 2014 and 2013 and $35 million and $3 million for the
fiscal year ended November 30, 2012 and one month ended December 31, 2012, respectively.
Discount and Interchange Revenue
Discount and interchange revenue includes discount revenue and acquirer interchange net of interchange paid to
network partners. We earn discount revenue from fees charged to merchants with whom we have entered into card
acceptance agreements for processing credit card purchase transactions. We earn acquirer interchange revenue from
merchant acquirers on all Discover Network card transactions and certain Diners Club transactions made by credit card
customers at merchants with whom merchant acquirers have entered into card acceptance agreements for processing
credit card purchase transactions. We incur an interchange cost to card issuing entities that have entered into
contractual arrangements to issue cards on the Discover Network and on certain transactions on the Diners Club
network. This cost is contractually established and is based on the card issuing organization's transaction volume and is
reported as a reduction to discount and interchange revenue. We offer our customers various reward programs,
including the Cashback Bonus reward program, pursuant to which we pay certain customers a percentage of their
purchase amounts based on the type and volume of the customer's purchases. Reward costs are recorded as a
reduction to discount and interchange revenue.
Discount and interchange revenue decreased for the year ended December 31, 2014 as compared to the year
ended December 31, 2013, driven primarily by the rewards redemption policy change. This increase in rewards was
partially offset by the increase in gross discount and interchange revenue, which was primarily attributable to higher
sales volume. Discount and interchange revenue increased for the calendar year ended December 31, 2013 as
compared to the fiscal year ended November 30, 2012, driven by higher sales volume.