Discover 2015 Annual Report Download - page 107

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Notes to the Consolidated Financial Statements
1. Background and Basis of Presentation
Description of Business
Discover Financial Services (“DFS” or the “Company”) is a direct banking and payment services company. The
Company is a bank holding company under the Bank Holding Company Act of 1956 as well as a financial holding
company under the Gramm-Leach-Bliley Act and therefore is subject to oversight, regulation and examination by the
Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company provides direct banking
products and services and payment services through its subsidiaries. The Company offers its customers credit card
loans, private student loans, personal loans, home equity loans and deposit products. The Company also operates the
Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”). The Discover Network
processes transactions for Discover-branded credit cards and provides payment transaction processing and settlement
services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the
PULSE network with access to ATMs domestically and internationally, as well as point-of-sale ("POS") terminals at retail
locations throughout the U.S. for debit card transactions. Diners Club is a global payments network of licensees, which
are generally financial institutions, that issue Diners Club branded charge cards and/or provide card acceptance
services.
The Company’s business segments are Direct Banking and Payment Services. The Direct Banking segment
includes Discover-branded credit cards issued to individuals on the Discover Network and other consumer products and
services, including private student loans, personal loans, home equity loans, and other consumer lending and deposit
products. The Company announced the closure of its the mortgage origination business in June 2015 as described in
Note 3: Business Dispositions. The majority of Direct Banking revenues relate to interest income earned on the segment's
loan products. Additionally, the Company's credit card products generate substantially all revenues related to discount
and interchange, protection products and loan fee income.
The Payment Services segment includes PULSE, an automated teller machine, debit and electronic funds transfer
network; Diners Club, a global payments network; and the Company’s Network Partners business, which provides
payment transaction processing and settlement services on the Discover Network. The majority of Payment Services
revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue (included in other
income) from Diners Club. Additionally until its sale on October 1, 2015, this segment included the business operations
of Diners Club Italy, which primarily consisted of activity related to issuing Diners Club charge cards in that country.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with
GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and related disclosures. These estimates are based on information available as of the date of the
consolidated financial statements. The Company believes that the estimates used in the preparation of the consolidated
financial statements are reasonable. Actual results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
The Company's policy is to consolidate all entities in which it owns more than 50% of the outstanding voting stock
unless it does not control the entity. However, the Company did not have a controlling voting interest in any entity other
than its wholly-owned subsidiaries in the periods presented in the accompanying consolidated financial statements.
It is also the Company's policy to consolidate any variable interest entity for which the Company is the primary
beneficiary, as defined by GAAP. On this basis, the Company consolidates the Discover Card Master Trust I ("DCMT")
and the Discover Card Execution Note Trust ("DCENT") as well as three student loan securitization trusts acquired in
2010. The Company is deemed to be the primary beneficiary of each of these trusts since it is, for each, the trust
servicer and the holder of both the residual interest and the majority of the most subordinated interests. Because of
those involvements, the Company has, for each trust, i) the power to direct the activities that most significantly impact
the economic performance of the trust, and ii) the obligation (or right) to absorb losses (or receive benefits) of the trust
that could potentially be significant. The Company has determined that it was not the primary beneficiary of any other
variable interest entity during the years ended December 31, 2015, 2014 and 2013.