FDIC and Federal Reserve Fine Discover, Alleging Credit Card Misclassification

The Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve Board fined Discover Financial Services and two subsidiaries, Discover Bank and DFS Services LLC, alleging that they misclassified consumer credit cards as commercial, thereby requiring merchants to pay higher interchange fees.

The FDIC said Wednesday (April 16) that it ordered Discover Bank to pay $1.225 billion in restitution and a $150 million civil money penalty after finding that the bank misclassified consumer credit cards as commercial.

This misclassification affected millions of consumer credit cards over 17 years and resulted in higher interchange fees for transactions processed on the Discover network, the FDIC said in a Friday press release.

“As a result of the Bank’s misclassification, merchants were overcharged over $1 billion in interchange fees when accepting payments with the misclassified credit cards,” the release said.

Reached by PYMNTS, Discover said in an emailed statement: “Discover has been working with regulators to resolve the card misclassification issue and today’s announcements by the Federal Reserve and FDIC highlight the significant progress we’ve made toward resolving this issue.”

According to the FDIC press release, the $1.225 billion in restitution will be paid to merchants, merchant acquirers and other intermediaries that were adversely affected by the misclassification of the credit cards.

In a concurrent action, the Federal Reserve Board issued a consent order requiring corrective action and assessing a civil money penalty of $100 million against Discover Bank’s parent holding company, Discover Financial Services and its subsidiary, DFS Services LLC.

The Federal Reserve said in a Friday (April 18) press release that the consent order and fine have to do with overcharging certain interchange fees from 2007 through 2023.

In the same press release, the Federal Reserve said it approved the application by Capital One Financial to merge with Discover Financial Services and thereby indirectly acquire Discover Bank.

“Discover has since terminated these practices and is repaying those fees to affected customers,” the release said of the overcharging of interchange fees. “The Board’s action is being taken in coordination with the Federal Deposit Insurance Corporation. As a condition of the Board’s approval of the merger application, Capital One has committed that it will comply with the Board’s action against Discover, including remediation requirements.”

Capital One said in a Friday press release that it has received all the regulatory approvals needed to complete the transaction and that it expects the transaction to close May 18, subject to customary closing conditions.

It was reported in February 2024 that Capital One expected the process of fixing Discover Financial’s regulatory challenges to be long and expensive.