Discover 2010 Annual Report Download - page 36

adversely affected credit card yields, and customers may frequently switch credit cards or transfer their balances to
another card. There can be no assurance that any of the expenses we incur or incentives we offer to attempt to acquire
and maintain accounts and increase card usage will be effective.
Furthermore, many of our competitors are larger than we are, have greater financial resources than we do and/or
have lower capital, funding and operating costs than we have and expect to have, and have assets such as branch
locations and co-brand relationships that may help them compete more effectively. We may be at a competitive
disadvantage as a result of the greater scale of many of our competitors.
Our expenses directly affect our earnings results. Many factors can influence the amount of our expenses, as well as
how quickly they may increase. Our ongoing investments in infrastructure, which may be necessary to maintain a
competitive business, integrate newly-acquired businesses, and establish scalable operations, may increase our expenses.
In addition, as our business develops, changes or expands, additional expenses can arise as a result of a reevaluation of
business strategies, management of outsourced services, asset purchases, structural reorganization, compliance with new
laws or regulations or the integration of newly acquired businesses. If we are unable to successfully manage our
expenses, our financial results will be negatively affected.
We face competition from other operators of payment networks, and we may not be able to compete effectively,
which could result in reduced transaction volume, limited merchant acceptance of our cards, limited issuance of cards
on our networks by third parties and materially reduced earnings.
We face substantial and increasingly intense competition in the payments industry. We compete with other payment
networks to attract third-party issuers to issue credit and debit cards and other card products on the Discover, PULSE and
Diners Club networks. Competition with other operators of payment networks is generally based on issuer interchange
fees, fees paid to networks (including switch fees), merchant acceptance, network functionality and other economic terms.
Competition also is based on customer perception of service quality, brand image, reputation and market share.
Many of our competitors are well established, larger than we are and/or have greater financial resources than we do.
These competitors have provided financial incentives to card issuers, such as large cash signing bonuses for new
programs, funding for and sponsorship of marketing programs and other bonuses. Visa and MasterCard each have been
in existence for more than 40 years and enjoy greater merchant acceptance and broader global brand recognition than
we do. Although we have made progress in merchant acceptance, we have not achieved global market parity with
MasterCard and Visa. In addition, Visa and MasterCard have entered into long-term arrangements with many financial
institutions that may have the effect of discouraging those institutions from issuing credit cards on the Discover Network or
issuing debit cards on the PULSE network. Some of these arrangements are exclusive, or nearly exclusive, which further
limits our ability to conduct material amounts of business with these institutions. If we are unable to remain competitive on
issuer interchange and other incentives, we may be unable to offer adequate pricing to third-party issuers while
maintaining sufficient net revenues. At the same time, increasing the transaction fees charged to merchants or increasing
acquirer interchange could adversely affect our effort to increase merchant acceptance of credit cards issued on the
Discover Network and may cause merchant acceptance to decrease. This, in turn, could adversely affect our ability to
attract third-party issuers and our ability to maintain or grow revenues from our proprietary network.
American Express is also a strong competitor, with international acceptance, high transaction fees and an upscale
brand image. Internationally, American Express competes in the same market segments as Diners Club. We may face
challenges in increasing international acceptance on our networks, particularly if third parties that we rely on to issue
Diners Club cards, increase card acceptance, and market our brands do not perform to our expectations.
In addition, if we are unable to maintain sufficient network functionality to be competitive with other networks, or if our
competitors develop better data security solutions or more innovative products and services than we do, our ability to
attract third-party issuers and maintain or increase the revenues generated by our proprietary card issuing business may
be materially adversely affected. An inability to compete effectively with other payment networks could result in reduced
transaction volume, limited merchant acceptance of our cards, limited issuance of cards on our network by third parties
and materially reduced earnings.
Our business depends upon relationships with issuers, merchant acquirers and licensees, which are generally financial
institutions. The adverse economic and regulatory environment and increased consolidation in the financial services
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