FDIC and Federal Reserve Fine Discover Bank over Misclassification of Credit Card Transactions

On April 18, the Federal Deposit Insurance Corporation (“FDIC”) and the Board of Governors of the Federal Reserve (the “Federal Reserve”) each announced a consent order against Discover and certain of its subsidiaries (collectively, “Discover”) in connection with Discover’s categorization of consumer credit cards for interchange purposes.

In particular, each of the FDIC and Federal Reserve found that Discover had misclassified consumer credit cards as commercial cards for interchange purposes. Readers may not be familiar with the intricacies of how credit card interchange fees operate, but commercial cards generally receive higher interchange rates than consumer cards, Commercial credit cards are therefore more expensive for merchants to accept and more lucrative for banks and card providers to offer. By misclassifying consumer credit cards as commercial, Discover overcharged merchants by more than $1 billion in interchange fees over a 17-year period.

As a result of the finding, Discover is required to pay $1.225 billion in restitution to impacted merchants and hundreds of millions of dollars in civil money penalties.

The enforcement actions are a lesson to banks and payments providers to take note of how their card programs are categorized with the networks for interchange purposes. Such decisions are often seen as commercial in nature and may not take legal and compliance input into account. As seen from the Discover case, these decisions can have massive regulatory ramifications and therefore getting proper input form compliance and legal is critical.

A copy of the FDIC’s consent order can be found here.

A copy of the Federal Reserve’s consent order can be found here.