Discover 2015 Annual Report Download - page 43

-27-
Compliance expectations and expenditures have increased significantly for Discover and other financial services
firms, and we expect them to continue to increase as regulators remain focused on controls and operational processes
and we introduce new products or enter into new business arrangements. We may face additional compliance and
regulatory risk to the extent that we enter into new business arrangements with third-party service providers, alternative
payment providers or other industry participants. The additional expense, time and resources needed to comply with
ongoing regulatory requirements may adversely impact our business and results of operations.
For more information regarding the regulatory environment and developments potentially impacting Discover,
see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Regulatory
Environment and Developments."
Strategic Business Risk
We face competition in the credit card market from other consumer financial services providers, and we may not be
able to compete effectively, which could result in fewer customers and lower account balances and could materially
adversely affect our financial condition, cash flows and results of operations.
The consumer financial services business is highly competitive. We compete with other consumer financial
services providers, including non-traditional providers such as financial technology firms, on the basis of a number of
factors, including brand, reputation, customer service, product offerings, incentives, pricing and other terms.
Competition in credit cards is also based on merchant acceptance and the value provided to the customer by rewards
programs. Many credit card issuers have instituted rewards programs that are similar to ours, and, in some cases, are
more attractive to customers than our programs. These competitive factors affect our ability to attract and retain
customers, increase usage of our products and maximize the revenue generated by our products. In addition, because
most domestically-issued credit cards, other than those issued by American Express, are issued on the Visa and
MasterCard networks, most other card issuers benefit from the dominant position and marketing and pricing power of
Visa and MasterCard. The competitive marketplace, combined with slow economic growth, has resulted and could
continue to result in slower loan growth, resulting in reduced revenue from our core direct banking business. If we are
unable to compete successfully, or if competing successfully requires us to take aggressive actions in response to
competitors' actions, our financial condition, cash flows and results of operations could be materially adversely affected.
We incur considerable expenses in competing with other consumer financial services providers, and many of our
competitors have greater financial resources than we do, which may place us at a competitive disadvantage and
negatively affect our financial results.
We incur considerable expenses in competing with other consumer financial services providers to attract and
retain customers and increase usage of our products. A substantial portion of these expenses relates to marketing
expenditures and rewards programs. We incurred expenses of $745 million and $735 million for marketing and
business development for the years ended December 31, 2015 and 2014, respectively. Rewards costs, including the
2014 charge for eliminating estimated forfeitures, amounted to $1.3 billion and $1.4 billion for the years ended
December 31, 2015 and 2014, respectively. Our consumer financial services products compete primarily on the basis
of pricing, terms and service. Because of the highly competitive nature of the credit card-issuing business, a primary
method of competition among credit card issuers, including us, has been to offer rewards programs, low introductory
interest rates, attractive standard purchase rates and balance transfer programs that offer a favorable annual
percentage rate or other financial incentives for a specified length of time on account balances transferred from another
credit card.
Competition is intense in the credit card industry, and customers may frequently switch credit cards or transfer
their balances to another card. We expect to continue to invest in initiatives to remain competitive in the consumer
financial services industry, including the launch of new cards and features, brand awareness initiatives, targeted
marketing, online and mobile enhancements, e-wallet participation, customer service improvements, credit risk
management and operations enhancements, and infrastructure efficiencies. There can be no assurance that any of the
expenses we incur or incentives we offer to attempt to acquire and maintain accounts and increase usage of our
products will be effective. In addition, to the extent that we offer new products, features or services to remain
competitive, we may be subject to increased operational or other risks.
Furthermore, many of our competitors are larger than we are, have greater financial resources than we do, have
more breadth in consumer banking products, and/or have lower funding and operating costs than we have and expect
to have, and have assets such as branch locations and co-brand relationships, that may be appealing to certain