This document provides a summary of recent developments in the credit card industry. It discusses how the industry is transitioning after years of tightening credit standards and regulatory changes. While loss rates are improving, issuers face challenges in generating profitable growth. The document also summarizes perspectives from analysts on opportunities and challenges for 2011, including ongoing effects of new regulations. It provides updates on Discover's international expansion and brand building efforts through sponsorships and promotions.

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Brought to you by Discover ... your partner in payment services ISSUE # 4 • SPRING 2011
Welcome 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 new
legislative, 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 recent
report on growth in the card industry
years is paying off as loss rates improve swiftly. Competition for cardholders is intensifying
from First Annapolis, and we’ve
via a new flow of direct mail offers, while certain market segments (e.g., partnerships and
asked one of our analytical partners,
even sub-prime) that experienced severe dislocation during the recession are regaining their
Mercator Advisors, to share some
footing. However, there are mixed messages surrounding the state of the consumer. Holiday
of their perspectives on the 2011
season spending in 2010 was a clear indication of pent-up demand at least among the more
marketplace. 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 “new
you 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 of
news in our global expansion
which were out of synch prior to the credit crisis. Underwriting, arguably the most fundamental
areas as partnerships and alliances
aspect of consumer lending, is once again a differentiator and driver of profitable growth with
worldwide have fueled our growth
many repricing levers no longer available after the CARD Act. Service, yes service, has the
and 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 to
years to come. There are also many
the lowest expense location. Consumer trust in many financial institutions was fractured and
new 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 price
sharing 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, the
support. As always, we welcome
your comments and your feedback.
next wave of growth opportunities promises to
IN THIS ISSUE
be quite exciting. Technology alone is paving
Best 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 changing
Kevin O’Donnell Unique Promotions and Sponsorships Build
in unimaginable ways through various forms
Group 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. 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 always
entire new categories of digital goods, services and currencies the case, card industry growth will be determined by the value
for that matter. The pace of change will put a premium on the it creates for consumers on Main Street. n
discipline 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 the
growth. The Internet era of the late ’90s taught many card payments industry. One of the firm’s principal specialties is credit card issuing
issuers 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, commercial
to be the next big opportunity. There will be no shortage of payments and mobile/emerging payments. The firm also provides a suite of
new opportunities that are the rage in Silicon Valley and on M&A advisory services and serves various international markets.
Washington Viewpoint
By Ray Messina, Asst. General Counsel and Vice President for Government Relations, Discover
The following is an update on congressional activity affecting run by a single director into
the consumer credit industry. a bipartisan commission, like
Debit Interchange — As the July deadline approaches for the FTC and the Consumer
compliance with the Dodd-Frank Act debit interchange fee Product Safety Commission.
restrictions (“Durbin Amendment”), bipartisan bills introduced The legislation may also require
in the House and Senate would delay the provision’s effective congressional approval of the
date pending a study of its impact. Approval of this legislation CFPB’s annual budget (the
by the House is likely, but House leaders are expected to bureau currently is funded
delay consideration until the Senate votes. A Senate vote is not through a guaranteed share
expected 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 Stability
least 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 prospects
from senators who supported the Durbin provision in 2010. for Senate approval seem dim, and a presidential veto is a
Senator Tester believes he will prevail, but the outcome strong possibility.
remains uncertain. The president has yet to nominate a director for the CFPB, and
Meanwhile, the Federal Reserve informed Congress that it there is some disagreement about the bureau’s authority after
will not meet its April deadline for issuing a final interchange its effective date if a director is not in place. Treasury believes it
regulation, and a U.S. district court considering a challenge can exercise all bureau powers while a vacancy exists, but the
to the Durbin Amendment refused to preliminarily enjoin the statute appears to require the approval of a bureau director for
rule, 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 sector
some in Congress less willing to support a legislative delay, has incurred significant expenses litigating, or settling, claims
but so far the pressure for a legislative solution continues. that patents on methods of doing non-financial business have
CFPB — The House Financial Services Committee has been been infringed upon by financial activities of banks and
conducting 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 and
hearings have been held, and Committee members have is under consideration in the House includes a new procedure
sent numerous requests for information to Professor Elizabeth for expedited review of the validity of such business method
Warren and other members of the Treasury Department’s CFPB patents. n
“Implementation Team.”
In May, the subcommittee will vote on legislation to restructure
the agency. The bill would turn the bureau from an agency
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3. International Expansion Broadens Discover Acceptance
®
Discover® has already achieved extensive
card acceptance across the United States.
At the same time, we have been expanding
payment options throughout North America
and the world. Reciprocal acceptance
agreements with major international payment
networks overseas are creating broad new
opportunities for both our business partners
and cardmembers. Our international
presence has grown considerably with the
acquisition of the Diners Club International®
network and our numerous partnerships with
foreign payment companies such as JCB,
China UnionPay and our newest partner, the
South Korea-based BCcard.
domestic network in South Korea. Its member banks have issued
In 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 bringing
moved onto the Discover Network. We have also enabled
to our merchant partners new customers and incremental sales
Discover card acceptance at Diners Club locations outside the
volume. Discover Cardmembers also get to use their cards
U.S. in more than 43 countries. Prior to the agreements with
globally, and visitors to the U.S. can use cards issued by the new
China UnionPay in 2005 and JCB in 2006, Discover had
partner networks. Diane Offereins, executive vice president for
very little presence outside North America.
payment services at Discover, stated, “All members can keep
Our recent alliance with BCcard will provide even more their local identity while having global acceptance.” We are
opportunities for both Discover and BCcard customers to access confident that our aggressive brand-building will continue to
a broad range of merchants worldwide. BCcard is the largest result in more sales for Discover merchants around the world. n
Credit Issuing Outlook for 2011
By Ken Paterson, VP Research Operations/Director, Credit Advisory Service, Mercator Advisory Group
If 2009, the year of the CARD Act, was the year of credit card potential effects of the recent
regulation, and 2010, the year of the Antitrust Settlement and the MasterCard®/Visa® antitrust
Durbin Amendment, was the year of credit card regulation, then settlement, and merchants may have considerable influence
2011 must also be the year of credit card regulation. Yes, there is over which card the consumer pulls from his/her wallet, and
a pattern here: New regulation will continue to be a major market ultimately over which cards consumers will find most valuable
mediator 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 that
significant, they are likely to be unpredictable in scope. What we significant card-pricing changes can emerge and be implemented
can see is a newly functional Consumer Financial Protection Bureau quickly, and that interchange is in the crosshairs. Perhaps the
that, 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 in
the terms and conditions, disclosures, and ongoing fine tuning of credit pricing that might jeopardize the availability of consumer
the CARD Act. credit in a soft economy. But it is not easy to ignore the events of
And don’t overlook the spillover effects of major changes in 2010 and the possibility of significant new
adjacent payment products. With the imminent release of debit regulatory initiatives that might further affect
interchange rules by the Federal Reserve, we will begin to credit card issuing in 2011. n
understand the potential crossover implications for credit cards. The views expressed in the preceding article are those
of Mercator Advisory Group, and do not necessarily
How motivating will the new pricing be to merchants to steer reflect the views of Discover.
consumers toward debit and away from credit? Overlay the
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4. Unique Promotions and Sponsorships Build Brand Awareness
One of the fastest growing forms of marketing in the U.S. is the recent Six Flags usage promotion that offered not only
sponsorship of major events, particularly in the sports media 5% discounts for using a Discover card, but also provided an
arena. 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 increasing
several marketing goals at once. More companies, such as visibility all during 2011 through a series of targeted
Discover, are turning to new kinds of marketing tools like event promotions with grocery and drug stores from February through
sponsorship, which has proven to be an extremely successful April, restaurants May through August, and travel and gas
way to build brand awareness. industries from September through December. In addition to
Wide exposure in both electronic and print media can build the automatic entry every time cardmembers use their Discover
brand visibility for any company. The kind of media coverage a card, they will receive 10 automatic entries in these categories
sponsor may get is often far greater than in regular advertising for usage.
so it can go a long way toward increasing brand awareness. Our network-wide sweepstakes promotes excitement and
Discover 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 public
Dame home games, the NHL All Star Game, the BCS and the school of the winning cardmember’s choice, and a one-time
Orange 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 promotions
five most watched college football games in ESPN history. can be great tools for driving sales and incremental volume on
In addition to sports sponsorships Discover is also increasing the Discover network. Some of the visibility provided by these
its brand presence by exposure to other events like the Wings promotions and the new Discover sponsorships is far greater
Over 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 awareness
in many other ways to promote cardmember awareness, like at every level. n
Did You Know?
Discover has an overall retail credit suite approach for their Private
Label products: Upcoming Industry Events
• 23rd Annual Card Forum & Expo, April 27–29, 2011,
Private Label Private Label Co-brand Fontainebleau, Miami Beach, FL
Basic Plus
In-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
www.nafcu-annual.org
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
thomaslaurent@discover.com
repeat visits • Revenue — higher
• Revenue revolve ratios
By implementing a Private Label Credit Card Program through
Discover, speed to market can be streamlined and new features
can also be added. For more information, please contact your © 2011 DFS Services LLC
relationship manager. n
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