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Discover Horizon Newsletter Spring 2011


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Latest news and information regarding the credit issuance landscape, as well as Discover. In this issue we cover card industry growth, Washington viewpoint update on congressional activity affecting the consumer credit industry, Discover acceptance expansion, credit issuing outlook for 2011, and more. For more info about Discover's solutions for credit unions visit

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Discover Horizon Newsletter Spring 2011

  1. 1. SM Brought to you by Discover ... your partner in payment services ISSUE # 4 • SPRING 2011Welcome to Horizon Card Industry Growth: A Return to Fundamentals SM Welcome to the By John Grund, Partner, First Annapolis latest issue of For the first time in years, card issuers HorizonSM — are talking about growth, as the triple a publication whammy of the credit crisis, CARD Act and recession gradually give way designed to the realities of a new competitive environment. One of the starkest exclusively for challenges facing the industry is where profitable growth will come our credit issuing from as issuers shift their attention from an internal to an external focus community and consumers do the same as household balance sheets stabilize. The partners. backdrop for achieving growth is not without problems — unemployment,The year 2010 was an interesting while improving, remains stubbornly high; the price of gasoline is fast approaching a record;time for cards and payments, with the housing market has not yet recovered; and regulatory uncertainty looms as the newlegislative, as well as economic, Federal Consumer Financial Protection Bureau takes shape.challenges. This issue includes a In many ways, the card industry is currently in a transitional state. The credit tightening of recentreport on growth in the card industry years is paying off as loss rates improve swiftly. Competition for cardholders is intensifyingfrom First Annapolis, and we’ve via a new flow of direct mail offers, while certain market segments (e.g., partnerships andasked one of our analytical partners, even sub-prime) that experienced severe dislocation during the recession are regaining theirMercator Advisors, to share some footing. However, there are mixed messages surrounding the state of the consumer. Holidayof their perspectives on the 2011 season spending in 2010 was a clear indication of pent-up demand at least among the moremarketplace. We’ve also included affluent customer segment, but other customer segments remain cautious and even debt-averse,an update from our own Government based on elevated payment rates. Collectively, after a nice bounce of an economic recovery,Relations department that I’m sure the challenge of generating profitable growth looms large for the industry. Ironically, the “newyou will find interesting. normal” sounds a lot like the old normal in that regard.We are proud to report the latest In our view, long-term industry growth will be driven by a return to fundamentals, some ofnews in our global expansion which were out of synch prior to the credit crisis. Underwriting, arguably the most fundamentalareas as partnerships and alliances aspect of consumer lending, is once again a differentiator and driver of profitable growth withworldwide have fueled our growth many repricing levers no longer available after the CARD Act. Service, yes service, has theand will continue to do so in the potential to be a growth driver and not just a cost center ripe for automation or off-shoring toyears to come. There are also many the lowest expense location. Consumer trust in many financial institutions was fractured andnew products and services being is in need of repair. Strategic focus is another fundamental that will drive profitable growth —developed, and we look forward to like consumers, issuers spread themselves too thin as they added products, partners and pricesharing those with you. points during the land grab that was in vogue prior to the crisis.Thank you again for your continued Despite a rather sobering past two years, thesupport. As always, we welcomeyour comments and your feedback. next wave of growth opportunities promises to IN THIS ISSUE be quite exciting. Technology alone is pavingBest Regards, the way for new forms of electronic payments/ Washington Viewpoint .......................................... 2 commerce with mobile and tablet devices International Expansion Broadens Discover® Acceptance ........................................... 3 creating new channels for customer Credit Issuing Outlook for 2011 .............................. 3 engagement. Consumer behavior is changingKevin O’Donnell Unique Promotions and Sponsorships Build in unimaginable ways through various formsGroup Executive, Credit Issuance Brand Awareness ................................................. 4 of social media capable of influencing choice, Did You Know? .................................................. 4 (continued on page 2) Upcoming Industry Events ..................................... 4
  2. 2. Card Industry Growth: A Return to Fundamentals (continued from page 1)price, access and delivery of traditional goods while creating Wall Street because of sheer size and scalability. As is alwaysentire new categories of digital goods, services and currencies the case, card industry growth will be determined by the valuefor that matter. The pace of change will put a premium on the it creates for consumers on Main Street. ndiscipline required to filter new opportunities so that investments The views expressed in the preceding article are those of First Annapolis,can be prioritized and risks can be mitigated. History offers a and do not necessarily reflect the views of Discover.lot of valuable learning that can guide the next wave of prudent First Annapolis is a specialized management consulting firm serving thegrowth. The Internet era of the late ’90s taught many card payments industry. One of the firm’s principal specialties is credit card issuingissuers the perils of chasing every bright, shiny object thought where it advises clients on strategic and tactical matters. Other practices include deposit access, merchant acquiring, retailer services, commercialto be the next big opportunity. There will be no shortage of payments and mobile/emerging payments. The firm also provides a suite ofnew opportunities that are the rage in Silicon Valley and on M&A advisory services and serves various international markets.Washington ViewpointBy Ray Messina, Asst. General Counsel and Vice President for Government Relations, DiscoverThe following is an update on congressional activity affecting run by a single director intothe consumer credit industry. a bipartisan commission, likeDebit Interchange — As the July deadline approaches for the FTC and the Consumercompliance with the Dodd-Frank Act debit interchange fee Product Safety Commission.restrictions (“Durbin Amendment”), bipartisan bills introduced The legislation may also requirein the House and Senate would delay the provision’s effective congressional approval of thedate pending a study of its impact. Approval of this legislation CFPB’s annual budget (theby the House is likely, but House leaders are expected to bureau currently is fundeddelay consideration until the Senate votes. A Senate vote is not through a guaranteed shareexpected until the bill’s cosponsors (Senator John Tester (D-MT) of Federal Reserve revenues),and Bob Corker (R-TN)) round up filibuster-proof support of at and enhance the ability of the inter-agency “Financial Stabilityleast 60 senators. Oversight Council” to override CFPB regulations.Supporters of the “stop and study” bill are closing in on this This legislation will have strong support in the Republican-goal through cosponsorships and voting commitments, including controlled House of Representatives. However, its prospectsfrom senators who supported the Durbin provision in 2010. for Senate approval seem dim, and a presidential veto is aSenator Tester believes he will prevail, but the outcome strong possibility.remains uncertain. The president has yet to nominate a director for the CFPB, andMeanwhile, the Federal Reserve informed Congress that it there is some disagreement about the bureau’s authority afterwill not meet its April deadline for issuing a final interchange its effective date if a director is not in place. Treasury believes itregulation, and a U.S. district court considering a challenge can exercise all bureau powers while a vacancy exists, but theto the Durbin Amendment refused to preliminarily enjoin the statute appears to require the approval of a bureau director forrule, or dismiss the challenge. Judicial or regulatory action that rulemaking and other activities.changed the proposed interchange standards might make Business Method Patents — The financial services sectorsome in Congress less willing to support a legislative delay, has incurred significant expenses litigating, or settling, claimsbut so far the pressure for a legislative solution continues. that patents on methods of doing non-financial business haveCFPB — The House Financial Services Committee has been been infringed upon by financial activities of banks andconducting oversight of the creation of the Consumer Financial other financial services providers. Legislation updating U.S.Protection Bureau, which begins operations in July. Several patent laws that has been approved by the U.S. Senate andhearings have been held, and Committee members have is under consideration in the House includes a new proceduresent numerous requests for information to Professor Elizabeth for expedited review of the validity of such business methodWarren and other members of the Treasury Department’s CFPB patents. n“Implementation Team.”In May, the subcommittee will vote on legislation to restructurethe agency. The bill would turn the bureau from an agency 2
  3. 3. International Expansion Broadens Discover Acceptance ®Discover® has already achieved extensivecard acceptance across the United States.At the same time, we have been expandingpayment options throughout North Americaand the world. Reciprocal acceptanceagreements with major international paymentnetworks overseas are creating broad newopportunities for both our business partnersand cardmembers. Our internationalpresence has grown considerably with theacquisition of the Diners Club International®network and our numerous partnerships withforeign payment companies such as JCB,China UnionPay and our newest partner, theSouth Korea-based BCcard. domestic network in South Korea. Its member banks have issuedIn 2008, Discover purchased Diners Club. To date, 97% of approximately 54 million cards.Diners Club volume in North America has been successfully The net effect of these agreements is that Discover is bringingmoved onto the Discover Network. We have also enabled to our merchant partners new customers and incremental salesDiscover card acceptance at Diners Club locations outside the volume. Discover Cardmembers also get to use their cardsU.S. in more than 43 countries. Prior to the agreements with globally, and visitors to the U.S. can use cards issued by the newChina UnionPay in 2005 and JCB in 2006, Discover had partner networks. Diane Offereins, executive vice president forvery little presence outside North America. payment services at Discover, stated, “All members can keepOur recent alliance with BCcard will provide even more their local identity while having global acceptance.” We areopportunities for both Discover and BCcard customers to access confident that our aggressive brand-building will continue toa broad range of merchants worldwide. BCcard is the largest result in more sales for Discover merchants around the world. nCredit Issuing Outlook for 2011By Ken Paterson, VP Research Operations/Director, Credit Advisory Service, Mercator Advisory GroupIf 2009, the year of the CARD Act, was the year of credit card potential effects of the recentregulation, and 2010, the year of the Antitrust Settlement and the MasterCard®/Visa® antitrustDurbin Amendment, was the year of credit card regulation, then settlement, and merchants may have considerable influence2011 must also be the year of credit card regulation. Yes, there is over which card the consumer pulls from his/her wallet, anda pattern here: New regulation will continue to be a major market ultimately over which cards consumers will find most valuablemediator for the credit card industry. to possess.Not only are new legal/regulatory challenges likely to be The final lessons from 2010 and the Durbin Amendment are thatsignificant, they are likely to be unpredictable in scope. What we significant card-pricing changes can emerge and be implementedcan see is a newly functional Consumer Financial Protection Bureau quickly, and that interchange is in the crosshairs. Perhaps thethat, based on stated goals and initial hiring, is highly likely to changed political environment will slow further potential changes,provide continued tough scrutiny to credit cards, and in particular and perhaps caution will prevail against major manipulations inthe terms and conditions, disclosures, and ongoing fine tuning of credit pricing that might jeopardize the availability of consumerthe CARD Act. credit in a soft economy. But it is not easy to ignore the events ofAnd don’t overlook the spillover effects of major changes in 2010 and the possibility of significant newadjacent payment products. With the imminent release of debit regulatory initiatives that might further affectinterchange rules by the Federal Reserve, we will begin to credit card issuing in 2011. nunderstand the potential crossover implications for credit cards. The views expressed in the preceding article are those of Mercator Advisory Group, and do not necessarilyHow motivating will the new pricing be to merchants to steer reflect the views of Discover.consumers toward debit and away from credit? Overlay the 3
  4. 4. Unique Promotions and Sponsorships Build Brand AwarenessOne of the fastest growing forms of marketing in the U.S. is the recent Six Flags usage promotion that offered not onlysponsorship of major events, particularly in the sports media 5% discounts for using a Discover card, but also provided anarena. Much of their popularity stems from the fact that a exclusive cardmember entrance at the park.sponsorship can offer the distinct advantage of achieving Our current Discover Everyday Giveaway is also increasingseveral marketing goals at once. More companies, such as visibility all during 2011 through a series of targetedDiscover, are turning to new kinds of marketing tools like event promotions with grocery and drug stores from February throughsponsorship, which has proven to be an extremely successful April, restaurants May through August, and travel and gasway to build brand awareness. industries from September through December. In addition toWide exposure in both electronic and print media can build the automatic entry every time cardmembers use their Discoverbrand visibility for any company. The kind of media coverage a card, they will receive 10 automatic entries in these categoriessponsor may get is often far greater than in regular advertising for it can go a long way toward increasing brand awareness. Our network-wide sweepstakes promotes excitement andDiscover has greatly expanded its brand presence through a awareness with 150 daily prizes of $25 Discover gift cards,growing list of high-profile sports sponsorships, including Notre monthly prizes of $25,000 plus $25,000 donated to a publicDame home games, the NHL All Star Game, the BCS and the school of the winning cardmember’s choice, and a one-timeOrange Bowl. Over 11 million people watched the Discover- grand prize of $1,000,000.branded Orange Bowl Game on TV, making it one of the top Sponsorships, sweepstakes and special merchant promotionsfive most watched college football games in ESPN history. can be great tools for driving sales and incremental volume onIn addition to sports sponsorships Discover is also increasing the Discover network. Some of the visibility provided by theseits brand presence by exposure to other events like the Wings promotions and the new Discover sponsorships is far greaterOver Homestead Air Show, November 6 – 7, 2010, where than any traditional form of advertising could ever provide —over 400,000 people were in attendance. We are also working visibility that should translate into increased brand awarenessin many other ways to promote cardmember awareness, like at every level. nDid You Know?Discover has an overall retail credit suite approach for their PrivateLabel products: Upcoming Industry Events • 23rd Annual Card Forum & Expo, April 27–29, 2011, Private Label Private Label Co-brand Fontainebleau, Miami Beach, FL Basic PlusIn-store spend only In-store spend plus Full open spend • National Association of Federal Credit Unions complementary locations (NAFCU), 44th Annual Conference & Exhibition, There are benefits for both merchants and issuers with June 28–July 2, 2011, Private Label programs: Moscone West Convention Center, San Francisco, CA Merchant Value Drivers Issuer Value Drivers • ATPS/Co-Brand 2011, (Airline Travel Payments • Customer loyalty • Leverage of brand loyalty Summit), October 12–13, 2011, • Customer communication • Marketing access to Hilton Toronto, Toronto, Canada • Higher approval rates than merchant’s customers co-brand • Low-cost marketing channels • Turnkey simplicity • Engaged cardholders — If you have any article topics that you would like to see included • Brand exposure higher uptake, sales, loyalty in Horizon,SM please contact Thomas Laurent, Credit Issuance, at • Path to increased sales; • Cross-sell opportunities repeat visits • Revenue — higher • Revenue revolve ratiosBy implementing a Private Label Credit Card Program throughDiscover, speed to market can be streamlined and new featurescan also be added. For more information, please contact your © 2011 DFS Services LLCrelationship manager. n 4