Discover 2015 Annual Report Download - page 44

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customers. For example, larger credit card issuers, which have greater resources than we do, may be better positioned
to fund appealing rewards, marketing and advertising programs. We may be at a competitive disadvantage as a result
of the greater financial resources, diversification and scale of many of our competitors.
Our expenses directly affect our earnings results. Many factors can influence the amount of our expenses, as well
as how quickly they may increase. Our ongoing investments in infrastructure, which may be necessary to maintain a
competitive business, integrate newly-acquired businesses, and establish scalable operations, increase our expenses. In
addition, as our business develops, changes or expands, additional expenses can arise as a result of a reevaluation of
business strategies, management of outsourced services, asset purchases, structural reorganization, compliance with
new laws or regulations or the acquisition of new businesses. If we are unable to successfully manage our expenses, our
financial results will be negatively affected.
We face competition from other operators of payment networks and alternative payment providers, and we may not
be able to compete effectively, which could result in reduced transaction volume, limited merchant acceptance of our
cards, limited issuance of cards on our networks by third parties and materially reduced earnings from our payment
services business.
We face substantial and increasingly intense competition in the payments industry, both from traditional players
and new, emerging alternative payment providers. For example, we compete with other payment networks to attract
network partners to issue credit and debit cards and other card products on the Discover, PULSE and Diners Club
networks. Competition with other operators of payment networks is generally based on issuer fees, fees paid to
networks (including switch fees), merchant acceptance, network functionality and other economic terms. Competition is
also based on customer perception of service quality, brand image, reputation and market share. Further, we are facing
increased competition from alternative payment providers, who may create innovative network or other arrangements
with our primary competitors or other industry participants, which could adversely impact our costs, transaction volume
and ability to grow our business.
Many of our competitors are well established, larger than we are and/or have greater financial resources or
scale than we do. These competitors have provided financial incentives to card issuers, such as large cash signing
bonuses for new programs, funding for and sponsorship of marketing programs and other bonuses. Visa and
MasterCard each enjoy greater merchant acceptance and broader global brand recognition than we do. Although we
have made progress in merchant acceptance, we have not achieved global market parity with Visa and MasterCard. In
addition, Visa and MasterCard have entered into long-term arrangements with many financial institutions that may
have the effect of discouraging those institutions from issuing cards on the Discover Network or issuing debit cards on
the PULSE network. Some of these arrangements are exclusive, or nearly exclusive, which further limits our ability to
conduct material amounts of business with these institutions. If we are unable to remain competitive on issuer fees and
other incentives, we may be unable to offer adequate pricing to network partners while maintaining sufficient net
revenues.
We also face competition as merchants put pressure on transaction fees. Increasing merchant fees or acquirer
fees could adversely affect our effort to increase merchant acceptance of credit cards issued on the Discover Network
and may cause merchant acceptance to decrease. This, in turn, could adversely affect our ability to attract network
partners and our ability to maintain or grow revenues from our proprietary network. In addition, competitors'
settlements with merchants and related actions, including pricing pressures and/or surcharging, could negatively impact
our business practices. In response to the Dodd-Frank Act, competitor actions related to the structure of merchant and
acquirer fees and merchant and acquirer transaction routing strategies have adversely affected and are expected to
continue to adversely affect our PULSE network's business practices, network transaction volume, revenue and prospects
for future growth, and entry into new product markets. Visa has entered into arrangements with some merchants and
acquirers that has, and is expected to continue to have, the effect of discouraging those merchants and acquirers from
routing debit transactions to PULSE. In addition, the Dodd-Frank Act's network participation requirements and
competitor actions negatively impact PULSE’s ability to enter into exclusivity arrangements, which affects PULSE’s
business practices and may materially adversely affect its network transaction volume and revenue. PULSE filed a
lawsuit against Visa in late 2014 with respect to these competitive concerns, which will significantly impact expenses for
the payment services segment. PULSE’s transaction processing revenue was $159 million and $182 million for the years
ended December 31, 2015 and 2014, respectively.
American Express is also a strong competitor, with international acceptance, high transaction fees and an
upscale brand image. Internationally, American Express competes in the same market segments as Diners Club. We