Discover 2010 Annual Report Download - page 43

adverse consequences, including: limiting our ability to pay dividends to our stockholders; increasing our vulnerability to
changing economic, regulatory and industry conditions; limiting our ability to compete and our flexibility in planning for,
or reacting to, changes in our business and the industry; limiting our ability to borrow additional funds; and requiring us
to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds
available for working capital, capital expenditures, acquisitions and other purposes.
We may be unable to increase or sustain Discover card usage, which could impair growth in, or lead to diminishing,
average balances and total revenue.
A key element of our business strategy is to increase the usage of the Discover card by our customers, including
making it their primary card, and thereby increase our revenue from transaction and service fees and interest income.
However, our customers’ use and payment patterns may change because of social, legal and economic factors, and
customers may decide to use debit cards instead of credit cards, not to increase card usage, or to pay the balances within
the grace period to avoid finance charges. We face challenges from competing credit card products in our attempts to
increase credit card usage by our existing customers. Our ability to increase card usage also is dependent on customer
satisfaction, which may be adversely affected by factors outside of our control, including competitors’ actions and
legislative/regulatory changes. The CARD Act limits pricing changes that may impact an account throughout its lifecycle,
which may reduce our capability to offer lower price promotions to drive account usage and customer engagement. As
part of our strategy to increase usage, we have been increasing the number of merchants who accept cards issued on the
Discover Network. If we are unable to continue increasing merchant acceptance or fail to improve awareness of existing
merchant acceptance of our cards, our ability to grow usage of Discover cards may be hampered. As a result of these
factors, we may be unable to increase or sustain credit card usage, which could impair growth in, or lead to diminishing,
average balances and total revenue.
Our transaction volume is concentrated among large merchants, and a reduction in the number of, or rates paid by,
large merchants that accept cards on the Discover Network or PULSE network could materially adversely affect our
business, financial condition, results of operations and cash flows.
Discover card transaction volume was concentrated among our top 100 merchants in 2010, with our largest merchant
accounting for approximately 8% of that transaction volume. These merchants could seek to negotiate better pricing or
other financial incentives by continuing to participate in the Discover Network only on the condition that we change the
terms of their economic participation. Loss of acceptance at our largest merchants would decrease transaction volume,
negatively impact our brand, and could cause customer attrition. At the same time, we are subject to increasing pricing
pressure from third-party issuers as a result of the continued consolidation in the banking industry, which results in fewer
large issuers that, in turn, generally have a greater ability to negotiate higher interchange fees. In addition, some of our
merchants, primarily our remaining small and mid-size merchants, are not contractually committed to us for any period of
time and may cease to participate in the Discover Network at any time on short notice.
Actual and perceived limitations on acceptance of credit cards issued on the Discover Network or debit cards issued on
the PULSE network could adversely affect the use of Discover cards by existing customers, the attractiveness of the
Discover card to prospective new customers and interest of other financial institutions in issuing cards on the Discover
Network or the PULSE network. We may have difficulty attracting and retaining third-party issuers if we are unable to
add and retain acquirers or merchants who accept cards issued on the Discover or PULSE networks. As a result of these
factors, a reduction in the number of, or rates paid by, our merchants could materially adversely affect our business,
financial condition, results of operations and cash flows.
We may be unable to grow earnings if we are unable to increase or maintain the number of small and mid-size
merchants that participate in the Discover Network.
In order to expand our merchant acceptance among small and mid-size merchants, we have been entering into
agreements with and have been using third-party acquirers and processors to add merchants to the Discover Network
and accept and process payments for these merchants on an integrated basis with Visa and MasterCard payments. This
strategy could result in decreased revenues, higher expenses, degraded service and signage placement levels and
retaliatory responses from competitors. There can be no assurance that the use of third-party acquirers and processors
will continue to increase merchant acceptance among small or mid-size merchants, or that such third-party acquirers will
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