Discover 2010 Annual Report Download - page 89

Total other income decreased slightly for the year ended November 30, 2009 as adjusted, as compared to the year
ended November 30, 2008 as adjusted. This is primarily attributable to a decrease in loan fee income partially offset by
increases in fee product income and lower losses on investment securities. These key drivers as well as other factors are
discussed in more detail below.
Discount and Interchange Revenue
Discount and interchange revenue includes discount revenue and acquirer interchange net of interchange paid to third-
party issuers in the United States. 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 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. 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.
In 2010 we had higher sales volume than 2009, which was the key driver of the increase in discount and interchange
revenue. In total, our gross discount and interchange revenue increased by $140 million for the year ended
November 30, 2010 as compared to the year ended November 30, 2009 as adjusted, which was partially offset by a
$68 million increase in Cashback Bonus rewards earned by our customers.
Discount and interchange revenue increased slightly for the year ended November 30, 2009, as adjusted compared to
the year ended November 30, 2008, as adjusted, due to lower customer rewards costs, partially offset by lower revenues
earned on lower sales volume. Lower customer rewards costs were due to a decline in sales volume, partially offset by
adjustments made in the third quarter of 2008 to the rewards liability for an increase in expected forfeitures of
accumulated rewards.
Fee Products
We earn revenue related to fees received for selling ancillary products and services including debt deferment/debt
cancellation and identity theft protection services to customers. The amount of revenue recorded is generally based on
either a percentage of a customer’s outstanding balance or a flat fee and is recognized over the agreement or contract
period as earned. Fee products income increased slightly for the year ended November 30, 2010, as compared to the
year ended November 30, 2009 as adjusted primarily due to an increase in revenue from our identity theft protection
product. Fee products income increased for the year ended November 30, 2009 as adjusted, as compared to the year
ended 2008 as adjusted, largely due to an increase in the revenue from our debt deferment/debt cancellation product
and from our identity theft protection product. Additionally, fee products income increased in 2009 as compared to 2008
due to higher balances upon which the fees are based.
Loan Fee Income
Loan fee income consists primarily of fees on credit card loans and includes late, overlimit, cash advance,
pay-by-phone and other miscellaneous fees. However, effective February 2010, as a result of legislative changes, we no
longer charge overlimit or pay-by-phone fees on consumer credit card loans. The legislative changes also resulted in
changes to our late fee policy beginning August 2010.
In 2010, loan fee income decreased substantially as compared to 2009 as adjusted, primarily due to the legislative
changes mentioned above. We had a minimal level of overlimit fees in 2010 as compared to $82 million in 2009 as
adjusted, which was the last year in which we charged overlimit fees throughout the entire year (overlimit fees were $44
million in 2009 on a GAAP basis). Additionally, our late fee income declined by $45 million in 2010 as compared to
2009 as adjusted. This was due in part to the legislative changes mentioned above, but also due to a higher level of late
payment incidences in 2009 as a result of the credit environment at that time. In 2009 as adjusted, loan fee income
decreased as compared to 2008 as adjusted, primarily due to deferrals of balance transfer fees and higher charge-offs
and adjustments of loan fees, partially offset by an increase in income from late fees as discussed above.
-78-