Discover 2015 Annual Report Download - page 27

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Our approach to technology development and management involves both third-party and in-house resources. We
use third-party vendors for basic technology services (e.g., telecommunications, hardware and operating systems) as well
as for processing and other services for our direct banking and payment services businesses. We subject each vendor to
a formal approval process to ensure that the vendor can assist us in maintaining a cost-effective and reliable technology
platform. We use our in-house resources to build, maintain and oversee some of our technology systems. We believe
this approach enhances our operations and improves cost efficiencies.
Seasonality
In our credit card business, we experience fluctuations in transaction volumes and the level of loan receivables as
a result of higher seasonal consumer spending and payment patterns around the winter holidays, summer vacations
and back-to-school periods. In our student loan business, our loan disbursements peak at the beginning of a school's
academic semester or quarter. Although there is a seasonal impact to transaction volumes and the levels of credit card
and student loan receivables, seasonal trends have not caused significant fluctuations in our results of operations or
credit quality metrics between quarterly and annual periods.
Revenues in our Diners Club business are generally higher in the first half of the year as a result of Diners Club's
tiered pricing system where licensees qualify for lower royalty rate tiers as cumulative volume grows during the course
of the year.
Competition
We compete with other consumer financial services providers, including non-traditional providers such as
financial technology firms and payment networks on the basis of a number of factors, including brand, reputation,
customer service, product offerings, incentives, pricing and other terms. Our credit card business also competes on the
basis of reward programs and merchant acceptance. We compete for accounts and utilization with cards issued by
other financial institutions (including American Express, Bank of America, JPMorgan Chase and Citi) and, to a lesser
extent, businesses that issue their own private label cards or otherwise extend credit to their customers. In comparison to
our largest credit card competitors, our strengths include cash rewards, conservative portfolio management and strong
customer service. Competition based on cash rewards programs, however, has increased in recent years. Our student
loan product competes for customers with Sallie Mae and Wells Fargo, as well as other lenders that offer student loans.
Our personal loan product competes for customers primarily with Wells Fargo, PNC and peer to peer lenders. Our
home equity product faces competition primarily from traditional branch lending institutions like Wells Fargo, JP
Morgan Chase, U.S. Bank and PNC.
Although our student and personal loan receivables have increased, our credit card receivables continue to
represent most of our receivables. The credit card business is highly competitive. Some of our competitors offer a wider
variety of financial products than we do, including automobile loans, which may currently position them better among
customers who prefer to use a single financial institution to meet all of their financial needs. Some of our competitors
enjoy greater financial resources, diversification and scale than we do, and are therefore able to invest more in
initiatives to attract and retain customers, such as advertising, targeted marketing, account acquisitions and pricing
offerings in interest rates, annual fees, reward programs and low-priced balance transfer programs. In addition, some
of our competitors have assets such as branch locations and co-brand relationships that may help them compete more
effectively. Another competitive factor in the credit card business is the increasing use of debit cards as an alternative to
credit cards for purchases.
Because most domestically-issued credit cards, other than those issued on the American Express network, are
issued on the Visa and MasterCard networks, most other card issuers benefit from the dominant market share of Visa
and MasterCard. The former exclusionary rules of Visa and MasterCard limited our ability to attract merchants and
credit and debit card issuers, contributing to Discover not being as widely accepted in the U.S. as Visa and
MasterCard. Merchant acceptance of the Discover card has increased in the past several years, both in the number of
merchants enabled for acceptance and the number of merchants actively accepting Discover. We continue to make
investments in expanding Discover and Diners Club acceptance in key international markets where an acceptance gap
exists.
In our payment services business, we compete with other networks for volume and to attract network partners to
issue credit, debit and prepaid cards on the Discover, PULSE and Diners Club networks. We generally compete on the
basis of customization of services and various pricing strategies, including incentives and rebates. We also compete on
the basis of issuer fees, fees paid to networks (including switch fees), merchant acceptance, network functionality,
customer perception of service quality, brand image, reputation and market share. The Diners Club and Discover