Discover 2010 Annual Report Download - page 35

The Credit Card Accountability Responsibility and Disclosure Act of 2009 restricts our business practices and
negatively impacts our results of operations.
The Credit Card Accountability Responsibility and Disclosure Act of 2009, or the CARD Act, has required us to make
fundamental changes to many of our business practices, including marketing, underwriting, pricing and billing. For
example, the CARD Act’s restrictions on our ability to increase interest rates on existing balances to respond to market
conditions and credit risk ultimately limits our ability to extend credit to new customers and provide additional credit to
current customers. In addition, the CARD Act’s requirement to allocate payments on accounts in excess of the minimum
payment due to balances with the highest annual percentage rates before balances with lower annual percentage rates
has and will continue to reduce our interest income. Also, the CARD Act’s requirement to review and, in some cases,
adjust annual percentage rate increases since January 1, 2009, which became effective in August 2010, will result in
reduced interest income. We rely heavily on interest income. Our interest income from credit card loans was $5.8 billion
for the 2010 fiscal year, which was 88% of revenues (defined as net interest income plus other income), compared to
$6.2 billion in the 2009 fiscal year, as adjusted. The CARD Act’s restrictions on late and other penalty fees have reduced
our loan fee income and may impact our ability to deter late payments. Our loan fee income was $340 million for the
2010 fiscal year, which was 5% of revenues, compared to $494 million in the 2009 fiscal year, as adjusted.
We have made changes to our pricing, credit and marketing practices designed to lessen the impact of the changes
required by the CARD Act. The long-term impact of the CARD Act on credit card industry profitability generally, and on
our business practices and revenues, will depend upon consumer behavior and the actions of our competitors, which
remain difficult to predict. Consumers may generally choose to use credit cards less frequently or for smaller dollar
amounts. We may have to reconsider certain strategies in order to remain competitive. For example, in the event of
another market downturn, we may have to consider expense-reduction initiatives in order to offset our inability to
generate increased interest and fee income due to the CARD Act’s repricing restrictions. If the changes we have made
and may make in the future to offset the impact of the CARD Act are not effective in the long term, they may have a
material adverse effect on our business and results of operations.
We face competition from other credit card issuers, and we may not be able to compete effectively, which could result
in fewer customers and lower account balances and could materially adversely affect our financial condition, cash
flows and results of operations.
The credit card issuing business is highly competitive. We compete with other credit card issuers on the basis of a
number of factors, including brand, reputation, rewards programs, customer service, merchant acceptance, product
offerings, incentives and pricing. This competition affects our ability to obtain applicants for our credit cards, increase
usage of our credit cards, maximize the revenue generated by card usage and generate customer loyalty and satisfaction
so as to minimize the number of customers switching to other credit card brands or debit cards. Competition is also
increasingly based on the value provided to the customer by rewards programs. Many credit card issuers have instituted
rewards programs that are similar to ours, and issuers may in the future institute rewards programs that are more
attractive to customers than our programs.
In addition, because most domestically issued credit cards, other than those issued by American Express, are issued on
the Visa and MasterCard networks, most other card issuers benefit from the dominant position and marketing and pricing
power of Visa and MasterCard. If we are unable to compete successfully, or if competing successfully requires us to take
aggressive actions in response to competitors’ actions, our financial condition, cash flows and results of operations could
be materially adversely affected.
We incur considerable expenses in competing with other credit card issuers, and many of our competitors have
greater scale, which may place us at a competitive disadvantage and negatively affect our financial results.
We incur considerable expenses in competing with other credit card issuers to attract and retain customers and
increase card usage. A substantial portion of these expenses relates to marketing expenditures. We incurred expenses of
$463 million and $406 million in the 2010 and 2009 fiscal years, respectively, for marketing and business development.
Because of the highly competitive nature of the credit card issuing business, a primary method of competition among
credit card issuers, including us, has been to offer rewards programs, low introductory interest rates, attractive standard
purchase rates and balance transfer programs that offer a favorable annual percentage rate or other financial incentives
for a specified length of time on account balances transferred from another credit card. This type of competition has
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