1) GE Capital Retail Finance supports retailers' strategies of driving sales and managing credit costs through an integrated point-of-sale application offering private label and co-branded credit cards with instant credit. Discover understands and supports this flexible approach. 2) GE measures acquisition success through metrics like new accounts, approval rates, and same-day activation, but ultimately through helping retailers increase sales and credit penetration. 3) Maintaining customer acquisitions requires a compelling consumer value proposition and close alignment between GE and retail partners on mutual goals like in-store marketing and sales associate support.

1. SM
Brought to you by Discover ... your partner in payment services Issue # 5 • summer 2011
Welcome to Horizon Main Street and Online Finally Coexist
SM
The newest issue of HorizonSM is here and By Philip J. Philliou, Philliou Partners LLC
we welcome the opportunity to once again
Local Mom and Pop retailers all over the United States have been under enormous
update our partners on relevant topics in
pressures. The downturn in the economy and intense discounting by national
the payments industry.
retailers have been a challenge for many Main Street retailers. The small retailers’
There have been many exciting developments efforts to fight back with superior customer service has been matched by equally
in the legislative and regulatory arenas so strong customer service from online retailers. The online retailers, who already had
we’re including a lengthy “Washington the advantage of low overhead, being open 24/7 and massive warehouses full
Viewpoint” with as much up-to-date of inventory, have mastered next-day delivery. Online retailers and their overnight
information for the financial services industry
delivery partners, FedEx and UPS, have made every household with an Internet
as possible. We anticipate having even more
connection a customer. The tension between Main Street and online retailing is palpable.
details to share in the coming issues.
The good news is that the relationship between Main Street and online appears to
Our overview of the Discover U.S. Spending
be evolving. The notion of Online to Offline (O2O) commerce is breathing life into
Monitor has relevant information on the
participating local merchants. The definition of O2O includes group-buying sites
current spending habits and trends in the
where purchases are made online and fulfilled offline, as well as offline purchases
economy as a whole, as well as some
that are influenced by online. Finding customers online through coupons, deals,
credit union–specific customer spending
sweepstakes and other incentives are bringing customers into local merchants.
details. In our consultant’s corner, we have
The bottom line is that online is finally starting to help Main Street sell.
an interesting article from the Tower Group
about credit card retention tactics and Location technologies use a consumer’s mobile device as a beacon
from Philliou Partners, a great comparison From a technology perspective, location-based technologies and the slick applications
between Main Street retailers and online that leverage them have helped to bring about O2O. Foursquare, Gowalla and
merchants. Facebook’s Places are location-based social networking tools. On Foursquare, a
Please enjoy and, as always, we appreciate user “checks in” to locations (as pinpointed via satellite) to invite along friends, leave
your comments. tips glued to GPS coordinates (like ordering advice at restaurants), and compete
for digital rewards in the form of badges, or titles like “mayor” (for the user who
Best,
checks in the most at a venue). Similarly, Gowalla asked users to check into places in
order to collect digital goodies, akin to virtual geocaching. With Facebook’s Places,
consumers check in to get individual discounts, share savings with friends, and
Kevin O’Donnell earn rewards for repeat visits. For Mom and Pop businesses it couldn’t be easier to
Group Executive, Credit Issuance participate with all three of these companies.
Amazon will continue to give local booksellers a run for their money just as Zappos
IN THIS ISSUE (acquired by Amazon) will do the same against local shoe
stores. However, Online to Offline now provides local retailers
Washington Viewpoint .............................. 2 with a meaningful way to participate and benefit from the
immense power of the Internet. n
Did You Know? ....................................... 2
Timely Resolution of Customer Disputes Philip J. Philliou is Managing Partner of Philliou Partners, LLC, trusted
advisors to Card Issuers and Retailers. Philip has over 16 years of
Retains Customers and Improves Profits ....... 3
payments industry and consulting experience with a track record for
Consumer Confidence Impacts Credit Union product leadership, developing new market opportunities, and
structuring innovative partnerships. See www.philliou.com
Members’ Spending ................................. 3
Point of Sale Acquisition ........................... 4

2. Washington Viewpoint
By Kathryn C. Kling, Nelson, Mullins, Riley & Scarborough, LLP
It has been a busy summer in Washington. This update discusses five-member commission, suspend the
recent legislative and regulatory activity relevant to the financial transfer to the CFPB of further powers until
services industry. a chair of such commission is confirmed
and make it easier for other regulators
Durbin Amendment Update
to override the CFPB’s rules. Other bills
When Horizon last visited the Durbin Amendment, the July deadline
aiming to restructure the CFPB have been
for compliance was fast approaching amid heated debate in
introduced in the Senate. It is currently
Congress, lawsuits challenging its constitutionality and concerns
thought that any bill restructuring the
of our nation’s top regulators as to its affect on the banking
CFPB is unlikely to pass the Senate, and the
industry. The Federal Reserve received over 11,000 comments
President has vowed to veto any such legislation.
on its proposed rules implementing the statute, over half of which
came from credit unions. Since the last Horizon issue, the Tester Martin Gruenberg, former vice chairman of the FDIC, was
Amendment to delay implementation failed to pass in the Senate, nominated on June 10 to succeed Sheila Bair as FDIC chair.
paving the way for the Federal Reserve’s final rules, issued June Prior to joining the FDIC Board, Gruenberg was counsel to Senator
29. The final rule has been criticized by both retailers and financial Paul Sarbanes and the Senate Banking Committee. Gruenberg is
institutions alike. thought to enjoy wide support from industry, consumer advocates
and members of both parties. Gruenberg is the Acting Chairman
The final rule caps interchange at $.21 per transaction plus an
of the FDIC pending his confirmation. Observers say he is quietly
adjustment equal to 0.05 percent of the transaction value to cover
assertive and takes time to dig into policy details. n
fraud losses — almost double the $.12 cap set forth in the Federal
Reserve’s proposed rules. Under an interim final rule, issuers that
comply with certain Federal Reserve guidelines may collect an
additional $.01 per transaction to recover fraud prevention costs. Did You Know?
The final rule maintains the exemption in the proposed rule for The Discover Offers product can be used to enable issuers and
the interchange cap for small issuers and government programs, merchants to build deeper consumer engagement through
but greatly narrows the exemption for prepaid card issuers to targeted messages and offers.
only apply to transactions using prepaid cards which are the only
Capabilities available with the initial product release will include:
means of accessing the funds underlying the card.
4 Merchant ability to load and manage offers
With regard to the Durbin Amendment’s network-routing provisions,
4 Issuer ability to distribute targeted messages
the final rule adopts “Alternative A” from the proposed rule which
requires issuers to enable two or more unaffiliated networks on 4 Cardmember ability to receive offers through multiple
each debit card (which can be any combination of unaffiliated channels — email, online, mobile and statements
networks, including one signature network and one PIN network, A six-month pilot of the Discover Offers product will begin in
two signature networks and two PIN networks). Most of the final mid to late August 2011.
rule’s provisions take effect October 1, about 10 weeks later than
the Durbin Amendment’s July 21 effective date. DiscoverNetwork.com Website Relaunch
We are excited to
New Regulators Appointed
announce the redesigned
On July 17, President Obama nominated Richard Cordray, the Discover Network website.
CFPB’s current enforcement chief and a former Ohio attorney
The launch is set for late
general, to be the director of the CFPB, created by the Dodd–Frank
September and includes
Act. The CFPB gained limited statutory authority on July 21 but will
an entire section devoted
not have its full powers until a director is confirmed.
to our Issuing Partners.
If confirmed, Cordray plans to have several aspects of the CFPB’s Check out “News & Events”
agenda ready for immediate implementation. This could include an for the latest details on
enforcement plan for the credit card industry — one of his stated products and services
main priorities. The CFPB has already launched a credit card enhancements. n
complaints portal.
Cordray’s road to confirmation will not be smooth, as Senate
Republicans have vowed to block any director nominee absent
significant structural changes to the CFPB. On July 21, the House
passed a bill which would replace the CFPB’s director with a
2

3. Timely Resolution of Customer Disputes Retains
Customers and Improves Profits
By Dennis Moroney, Research Director, Bank Cards, TowerGroup Credit Card Issuers Improve Customer Service
Retaining the most creditworthy and profitable customers TowerGroup estimates that industry-wide credit card voluntary
is essential for financial services institutions in this complex and involuntary account attrition exceeded 20 percent for 2009,
economic and regulatory environment. Credit card issuers should a 30 percent increase from 2008. A 20 percent customer attrition
examine their customer dispute resolution departments to ensure rate is a formula for business failure. Credit card issuers have
that their business process results in the timely and equitable been committed to address the challenge and reverse this trend.
resolution of customer billing and merchant disputes. Failure to The 2011 FTC Sentinel Report, which covers activity for 2010,
resolve customer disputes in a timely manner will increase account reported a 33 percent increase in total consumer complaints from
attrition and reduce profits. 2009 but a 15 percent decrease in the number of credit card
Because in reality the customer is not always right, any credit complaints. Credit card issuers provided clearer communications
card issuer must determine if the long-term customer relationship to consumers (mandated by the CARD Act), eased credit policies
value (CRV) of the customer in question justifies absorbing the cost and made back office improvements to the customer dispute and
of the dispute. The cost of replacing that customer and long-term resolution process and decreased customer attrition to 10 percent
revenue potential of the relationship may or may not exceed the for 2010.
amount in dispute. These costs must be calculated to justify any Credit Card Industry Trends Improving
decision.
Despite the sluggish U.S. economy and a changing regulatory
Managing Credit Card Risk and Profitability environment, recent trends are improving for credit card issuers.
To manage profitability during the recent financial crisis, credit The most recent financial updates from the Federal Deposit
card issuers tightened their lending policies, reduced new offers Insurance Corporation (FDIC) reported for the fourth quarter
of credit, and decreased customer credit lines in 2008 and 2009. 2010 and first quarter 2011 that credit card lender return on
This led to an increase in customer attrition and complaints to the assets (ROA), a key measure of credit card profitably, improved to
Federal Trade Commission (FTC). 2.77 percent and 3.68 percent respectively. This is a significant
Many of these credit card complaints were the result of intensive improvement compared to 0.55 percent and 0.68 percent for
credit card portfolio management by card issuers and questions the same periods one year prior, fourth quarter 2009 and first
pertaining to practices unfavorable to consumers that were quarter 2010.
addressed by the Credit Card Accountability, Responsibility, The current economic and legislative environment requires that
and Disclosure (CARD) Act of 2009. During this period, credit credit card issuers focus on their most creditworthy and profitable
card lenders closed large numbers of accounts and/or reduced customers. Credit card issuers should ensure that their chargeback
consumer credit lines by a cumulative total of more than and disputes resolution account teams are well trained and
$1.2 trillion. prepared to answer and resolve customer questions and disputes
within one billing cycle. When complex disputes exceed one
Retaining the Best Customer billing cycle, credit card issuers should keep the customer
Resolving customer billing and merchandise disputes in a timely informed throughout the dispute resolution process. Consumers
and fair manner is essential to hold on to valued customers. expect timely and equitable resolution of billing and merchandise
Credit card issuers that fail to quickly resolve credit card billing disputes. Failure to satisfy this expectation will increase customer
and merchant disputes will experience steep account attrition. attrition and reduce profits. n
Those that do not resolve a customer question and/or dispute
This article is based on research by the Retail Banking and Cards practice at
within one billing cycle increase their chance of losing profitable
TowerGroup, a leading research and advisory services firm focused exclusively
and creditworthy customers. The result is costly, since the on the global financial services industry. Research Director Dennis C. Moroney
estimated cost of replacing a creditworthy customer is more than can be reached at dmoroney@towergroup.com. Those interested in learning
more about TowerGroup or subscribing to its research services may call
$125 plus the loss of future revenue from the lost customer. 1.617.488.2000 or e-mail service-info@towergroup.com
Consumer Confidence Impacts Credit Union Members’ Spending
In the first quarter of 2011, both credit union members and the first time there is very little difference between the attitudes
non-members said economic conditions are impacting their of credit union members vs. non-members.
discretionary spending — causing them to cut back on things Economic and financial optimism among
like dinner, movies, and other entertainment spending. A rise consumers is also reflected in the spending
in overall expenses necessitates that most will need to spend patterns of credit union members. Quarterly
more on regular household expenses like gas, groceries and data released from the credit union member
mortgages. The Discover U.S. Spending Monitor reports that for
(continued on page 4)
3

4. Consumer Confidence Impacts Credit Union Members’ Spending (continued from page 3)
demographic of the monthly Discover U.S. non-credit union members,” said Kevin O’Donnell, vice president
Spending Monitor indicates consumers of credit issuance for Discover.
belonging to credit unions have the same Sentiment regarding the current economy has been impacted
feelings of apprehension as non-members by rises in household expenses overall. In January, 49 percent
about their personal finances and the of credit union members rated the economy as poor, compared
economy overall. to 52 percent of non-credit union members. When asked about
“Forces in the economy — notably higher their personal finances, about half of credit union members
gas prices — affect most everyone, and indicated they saw no improvement — a good indication that
may be contributing to the leveling of most discretionary spending will also continue to decline. n
economic confidence we’re seeing between credit union and
Point of Sale Acquisition brand that receives top-billing. The mutual
alignment is on flexibility with GE and
An Interview with Jeff Manchester, GE Capital Retail Finance Discover; both of us have a partner
Q. How has Discover supported GE Capital’s Retail Finance mindset and are willing and able to
Point of Sale (POS) acquisition strategy? support the wants and needs of the client
objectives. Cross-shopping via our private
A. Discover understands that GE Capital Retail Finance is in
label network is one example that comes
business to support our retailers’ strategies of driving retail
to mind.
sales and customer loyalty, and to manage their overall credit
program cost. Toward that end, at the point of sale we promote Q. How does GE Capital Retail Finance
an integrated application strategy offering our private label measure acquisition success?
credit and co-branded credit cards with instant credit. Discover A. With our six-sigma culture, GE has a strong focus on metrics;
understands this integrated “apply and buy” approach and has whether it is looking at new accounts per store, approval rates,
always openly supported GE as the Issuer with this strategy — same-day activation, etc. However, a true measure of success is
regardless of the mix of consumers that may receive PLCC or the if we are helping our partner to drive more sales and improving
co-brand and regardless of the mix of sales that may occur in or our overall penetration of sales at the retail partner.
out of our partner locations. Q. What techniques have you found most successful in
Q. How is GE Capital’s Retail Finance POS acquisition strategy maintaining customer acquisitions?
different from other merchant co-brand strategies? A. Clearly a compelling value proposition to the consumer
A. GE’s acquisition strategy differs from other merchant is key in maintaining customer acquisitions. Likewise, the
programs in several ways. First, we have an integrated more aligned we are with our partners on our mutual goals
application and a common management team. We have found and objectives, the better off we’ll be at ensuring success —
that many retail programs may have a PLCC application and whether it’s leveraging in-store signage to build awareness of
separately a co-branded application, often with the back end the program or building sales associate support to help them
being managed by different teams — PLCC experts or bankcard become the ambassadors of the products. Finally, our approach
experts not necessarily working together. With our integrated in upgrading qualified PLCC customers to a co-branded card
programs, we have been able to maintain consistency on has been a key part of maintaining customers throughout
marketing programs, cardholder benefits and the key contacts/ their lifecycle with GE — helping us to drive more value to the
relationships for our partners. Additionally, we helped navigate consumer for in and out of store purchases with our cards. n
the recession with an integrated application and we were able
Jeff Manchester, VP Bankcards and Protection Products for GE Capital
to maintain higher approval rates seamlessly for our retailers,
leads the bankcard activities for Retail Finance, including portfolio
because we offered the two products: PLCC and Co-Brand. management, relationship management of the networks, and the financial
Later, once the consumer had established their payment protection products team for the private label and bankcard products.
behavior, coupled with an improving economy, we have been The views of Philliou Partners LLC, Tower Group, and GE Capital Retail Finance as expressed in this Newsletter
able to upgrade account holders to the co-branded solution. do not necessarily reflect the views of Discover. We appreciate the contributions of these guest authors.
Q. How does Discover branding align with GE Capital Retail
If you have any article topics that
Finance’s branding/ retail partners?
you would like to see included in
A. From my perspective, I would not focus on branding as the Horizon, please contact
SM
Manisha Patel, Credit Issuance,
key alignment, as typically the GE brand is not on the front of
at manishahpatel@discover.com
our card for our co-branded program, instead it is our retailer’s
© 2011 DFS Services LLC 4