Tuesday, July 16, 2024
According to a Q10 filing with the Securities and Exchange Commission, the money has been set aside for refunds due to "card product misclassification." The company, in its July 3, 2024, filing, said it had reached an agreement with those affected by the misclassification, which dates back as far as 2007 and continued through 2017.
During a July 2023 earnings call then Discover CEO Roger Hochschild revealed that Discover had "incorrectly classified certain card accounts into our highest merchant and merchant-acquiring pricing tier," according to reporting at the time. Soon after that Hochschild resigned his position at Discover.
The settlement, which is subject to court approval, comes as Discover seeks to put its books in order for its acquisition by Capital One Financial Corp.h in an all-stock transaction valued at $35.3 billion. That deal, disclosed in February 2024, is expected to create a global payments platform with 70 million acceptance points across 200 countries and territories. Capital One has said it hopes to close the deal later this year or in early 2025.
The acquisition, which is subject to shareholder and regulatory approvals, is not a slam dunk, however. The Biden Administration has taken a dim view of corporate mega-mergers, including those in finance and big tech. In a July 2021 briefing paper, the White House said there needed to be "more robust scrutiny of [banking] mergers" by the Department of Justice and banking regulators.
Leo Arumanyan of Global Legal Law Firm, in "The potential impact of Capital One's acquisition of Discover," published May 13, 2024, by The Green Sheet, described Cap One's bid to acquire Discover as a "pivotal moment" in the card industry. "The amalgamation of these two industry powerhouses promises to create a formidable entity, potentially rivalling the dominance of Visa and Mastercard," he wrote.
Discover's $1.2 billion settlement proposal with merchants pales in comparison to a $30 billion settlement proposed in a long-standing antitrust case that pitted Mastercard and Visa against merchants over interchange and related issues.
That agreement would have lowered interchange by four basis points and kept those lower rates in place for four years. It also would have allowed merchants to steer customers to lower-cost cards and simplified rules around dual pricing.
But the judge overseeing the case, Margo K. Brodie, chief justice of the U.S. District Court for the Eastern District of New York, rejected that proposal and sent the card brands and merchants back to the negotiating table. Bloomberg News reported that Brodie decried that the settlement amount "disproportionately" benefitted small merchants over large retailers.
In addition, Reuters reported that the judge called the estimated $6 billion of annual savings for merchants "paltry" compared with the estimated $100 billion in fees they paid to accept Visa and Mastercard in 2023.
In an unrelated development the U.S. District Court for the Southern District of Texas in June OKed a settlement agreement between Visa and Pulse, the ATM/POS network owned by Discover. Pulse had claimed Visa was obstructing competition in the debit card network services market. Terms of the agreement were not disclosed, but the court said the lawsuit was dismissed "with prejudice," which means the judgement is final. 
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