The Federal Deposit Insurance Corporation (FDIC) has announced three enforcement actions against Discover Bank, headquartered in Greenwood, Delaware, in response to longstanding issues with credit card classification that resulted in merchants being overcharged more than $1bn in interchange fees.
The FDIC issued an Amended and Restated Consent Order requiring Discover Bank to implement corrective action, an Order for Restitution mandating a plan to return at least $1.225bn to adversely affected merchants and intermediaries, and an Order to Pay imposing a $150m civil money penalty.
The agency’s investigation found that for approximately 17 years, Discover Bank had misclassified millions of consumer credit cards as commercial cards. This misclassification caused merchants using the Discover network to incur significantly higher interchange fees, which are typically greater for commercial card transactions. The misclassification led to systemic overcharging across a wide range of transactions, impacting merchants, merchant acquirers, and other intermediaries.
The FDIC noted that Discover Bank’s actions violated the Federal Trade Commission Act, prompting the need for restitution and penalties. The scale of the overcharging – more than $1bn – underscores the severity of the misclassification, and the restitution plan is intended to rectify the financial harm caused to affected merchants.
In a related development, the Board of Governors of the Federal Reserve System also took action against Discover Bank’s parent holding company, Discover Financial Services, based in Riverwoods, Illinois, and its subsidiary, DFS Services LLC. The Federal Reserve ordered additional corrective action and imposed a $100m civil money penalty, highlighting the broad regulatory response to the misconduct.
The combined enforcement measures by the FDIC and the Federal Reserve reflect a coordinated effort to hold the bank and its parent accountable for the long-term misrepresentation, ensure remediation for affected parties, and restore integrity to its card classification practices.
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