CHICAGO — Discover Financial Services is reportedly in the process of settling a class-action lawsuit that accuses the firm of excessively charging merchants. This action was publicly disclosed through a filing with the Securities and Exchange Commission on Wednesday, detailing that as of March 31, 2024, Discover has allocated $1.2 billion for refunds due to the misclassification of certain card products. The company has confirmed that this amount should cover all necessary payments under the proposed settlement.
Previously, during a July earnings call, the financial services company admitted to incorrectly categorizing some card accounts into its highest merchant pricing tier for over a decade beginning in mid-2007. Shortly after this confession, then-CEO Roger Hochschild stepped down from his position. Still awaiting court approval, the settlement was reached with the concerned merchants on July 1.
In parallel, Discover is navigating through a significant phase in its corporate journey, being in the midst of a massive acquisition by Capital One. Announced in February, the $35.3 billion deal promises to establish a significant global payments platform, projected to feature 70 million merchant acceptance points spanning over 200 countries and territories. This acquisition is poised to reshape the landscape of global payments, although it faces substantial regulatory scrutiny.
Jim McCarthy, CEO of Thredd, commented on the significant challenges and decisions ahead for Capital One in integrating Discover’s assets. He emphasized the complexity of such large-scale mergent activities and the strategic considerations involved.
Adding to the scrutiny around this deal, Rohit Chopra, Director of the Consumer Financial Protection Bureau, voiced concerns in April regarding the ramifications of mega-mergers, especially involving substantial financial institutions like Discover and Capital One. Chopra highlighted the need for careful scrutiny to assess the competitive impacts and implications on financial stability if such entities were to fail.
The timing of Discover’s proposed settlement is noteworthy, coming shortly after the company’s Pulse Network reached a resolution in a decade-old antitrust lawsuit against Visa. Pulse had accused Visa of suppressing competition in the debit card network services market, leading to inflated fees for merchants. The specifics of the Visa settlement, however, remain under wraps.
Industry analysts suggest that these settlements and regulatory pressures might influence the financial strategies of major players in the financial services sector. Moreover, the outcomes of these legal challenges could set precedents affecting fee structures and competitive practices industry-wide.
The unfolding developments underscore a period of significant recalibration for Discover, as it navigates both legal challenges and integration processes that will likely influence its operations and strategic direction in the evolving financial services landscape.