Discover 2010 Annual Report Download - page 34

could be significant, depending upon final implementing regulations, the actions of our competitors and the behavior of
other marketplace participants. In addition, we may be required to invest significant management time and resources to
address the various provisions of the Reform Act and the numerous regulations that are required to be issued under it.
The Reform Act and any related legislation or regulations could have a material adverse effect on our business, results of
operations and financial condition.
The new Bureau of Consumer Financial Protection may increase our compliance costs and have a significant impact on
our business.
The Reform Act creates a new federal regulatory agency, the Bureau of Consumer Financial Protection (the “BCFP”).
Headed by a single Director and not subject to the Congressional appropriations/oversight process, the BCFP is expected
to have a large budget and staff, and has broad authority with respect to most of the businesses in which we engage. It
will write regulations under federal consumer financial protection laws, and enforce those laws against and examine
large financial institutions like us for compliance. It will collect fines and provide consumer restitution in the event of
violations, engage in consumer financial education, track consumer complaints, request data and promote the availability
of financial services to underserved consumers and communities. It has authority to prevent “unfair, deceptive or abusive”
practices by issuing regulations or by using its enforcement authority without first establishing regulatory guidance.
Depending on how the BCFP functions and its areas of focus, it could have a material adverse impact on our businesses.
For example, the BCFP is expected to establish multiple divisions, each with its own rule writing and compliance
examination specialists, to focus on businesses in which we engage (such as revolving loans, other consumer loans, and
payments). In addition to increasing our compliance costs and potentially delaying our ability to respond to marketplace
changes, this could result in requirements to alter our products and services that would make our products less attractive to
consumers and impair our ability to offer them profitably. Should the BCFP discourage the use of products we offer or steer
consumers to other products or services that it deems to be preferable, we could suffer reputational harm and a loss of
customers. The BCFP’s authority to change regulations adopted in the past by other regulators (e.g., regulations issued
under the Truth in Lending Act or the CARD Act (defined below) by the Federal Reserve), or to rescind or ignore past
regulatory guidance, could increase our compliance costs and litigation exposure.
The Reform Act authorizes state officials to enforce regulations issued by the BCFP and to enforce the Reform Act’s
general prohibition against unfair, deceptive or abusive practices, and makes it more difficult than in the past for federal
financial regulators to declare state laws that differ from federal standards to be preempted. To the extent that states enact
requirements that differ from federal standards or state officials and courts adopt interpretations of federal consumer laws
that differ from those adopted by the BCFP, we may be required to alter products or services offered in some jurisdictions
or cease offering products, which will increase compliance costs and reduce our ability to offer the same products and
services to consumers nationwide.
Recent legislative and regulatory reforms related to the debit card market may have a significant impact on our PULSE
network business and may result in decreases in our PULSE network volume and revenue.
The Reform Act contains several provisions that may adversely affect PULSE’s business practices, network transaction
volume, revenue, and prospects for future growth. First, the Reform Act will require that interchange fees paid to or
charged by payment card issuers on debit card transactions be “reasonable and proportional” to the issuer’s cost in
connection with authorization, clearance or settlement of such transactions. The Federal Reserve also has the power to
regulate network fees to the extent necessary to prevent circumvention of interchange regulation under the Reform Act.
These requirements may significantly affect the debit card market, decrease prospects for future growth of debit products,
negatively impact PULSE’s transaction volume and revenue, and require costly system changes. Our transaction
processing revenue was $150 million and $125 million for the years ended November 30, 2010 and 2009, respectively.
The Reform Act also requires Federal Reserve rulemaking to restrict debit card networks and issuers from requiring debit
card transactions to be processed solely on a single payment network or two or more affiliated networks, or from
requiring that transactions be routed over certain networks. This restriction will impact PULSE’s ability to enter into
exclusivity arrangements, which will affect PULSE’s current business practices and may materially adversely affect its
network transaction volume and revenue. The impact of these provisions on PULSE will depend upon Federal Reserve
implementing regulations, the actions of our competitors, and the behavior of other marketplace participants. The Federal
Reserve issued proposed regulations for comment in December 2010, and we are currently evaluating the proposal.
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