Discover 2010 Annual Report Download - page 90

Merchant Fees
To broaden merchant acceptance of Discover Network cards, we began outsourcing our acquisition and servicing of
small and mid-sized merchants to merchant acquiring organizations in late 2006. We have also sold small and mid-size
merchant portfolios to third-party acquirers to facilitate integrated servicing and to reduce costs. As we have moved away
from direct merchant relationships, our merchant fee income and related costs have declined from $67 million in 2008 to
$44 million in 2009 and $28 million in 2010. The lower income per transaction is generally offset by increased volume
due to broader acceptance.
Transaction Processing Revenue
Transaction processing revenue represents switch fees charged to financial institutions and merchants for processing
ATM, debit and point-of-sale transactions over the PULSE network, as well as various participation and membership fees.
Switch fees are charged on a per transaction basis. Transaction processing revenue increased in 2010 as compared to
2009, due to higher transaction volumes and higher margins at PULSE. Transaction processing revenue increased for
2009 as compared to 2008 primarily due to increased volumes partially offset by pricing incentives offered to financial
institutions, which are accounted for as an offset to transaction processing revenue.
Gain/Loss on Investment Securities
Gain/loss on investment securities includes realized gains and losses on the sale of investments as well as any write-
downs of investment securities to fair value when the decline in fair value is considered other than temporary. During the
year ended November 30, 2010, we recorded a gain of $19.6 million relating to the liquidation of collateral supporting
the asset-backed commercial paper notes of Golden Key. The investment was originally purchased in 2007 for $120.1
million, subsequently written down to $51.3 million, largely as a result of other-than-temporary impairment of $8.2
million and $49.1 million recorded in 2009 and 2008, respectively. In August 2010, this investment was liquidated for
$70.9 million. See additional information in Note 5: Investment Securities to our consolidated financial statements.
Other Income
Other income includes royalty revenues earned by Diners Club, revenues from the referral of declined applications to
certain third-party issuers on the Discover Network and other miscellaneous revenue items.
Other income decreased in both 2010 and 2009 as adjusted as compared to the prior year periods. In 2010 and
2009 as adjusted, revenue from the referral of declined applications to third-party issuers was lower as compared to the
prior years due to a lower level of acquisition activity.
In 2010, other income also included a loss of $23 million related to our decision in 2010 to sell our remaining federal
student loans. In 2009 as adjusted, other income was higher than 2008 as adjusted due to the inclusion of a full year of
Diners Club revenue as compared to a half year in 2008 (Diners Club was acquired on June 30, 2008).
Other Expense
The following table represents the components of other expense for the periods presented (dollars in thousands):
For the Years Ended November 30,
2010 vs. 2009
increase (decrease)
2009 vs. 2008
increase (decrease)
2010
2009
(As Adjusted1) 2008 $ % $ %
Employee compensation and benefits ....................................... $ 802,649 $ 827,683 $ 845,392 $(25,034) (3%) $ (17,709) (2%)
Marketing and business development ....................................... 463,086 406,020 530,901 57,066 14% (124,881) (24%)
Information processing and communications.............................. 258,111 289,209 315,943 (31,098) (11%) (26,734) (8%)
Professional fees ................................................................... 342,648 321,329 349,484 21,319 7% (28,155) (8%)
Premises and equipment......................................................... 70,274 73,014 80,394 (2,740) (4%) (7,380) (9%)
Other expense ...................................................................... 245,897 304,841 293,683 (58,944) (19%) 11,158 4%
Total other expense ............................................................ $2,182,665 $2,222,096 $2,415,797 $(39,431) (2%) $(193,701) (8%)
(1) See “ – Reconciliations of GAAP to As Adjusted Data.”
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