The Federal Deposit Insurance Corporation (FDIC) has issued three orders to Discover Bank after it found the bank misclassified millions of consumer credit cards as commercial.
The three orders include an Amended and Restated Consent Order, an Order for Restitution and an Order to Pay.
Under the Order for Restitution, Discover Bank is to return at least $1.2bn to merchants affected by the misclassification and has been ordered to publish its plans to do so.
One reason for the significant size of this sum of money is the length of time that the bank failed to notice this misclassification. An investigation by the FDIC found that Discover Bank had misclassified consumer credit cards for approximately 17 years.
The FDIC has ordered the bank to pay a $150m civil money penalty. Additionally, in a concurrent action, the Board of Governors of the Federal Reserve System issued an order requiring corrective action and assessing a civil money penalty of $100m against the bank’s parent company, Discover Financial Services and its subsidiary, DFS Services LLC.
Growing problems with interchange fees
Interchange fees are one of the most discussed issues when it comes to card transactions. The UK’s Payment Systems Regulator (PSR) announced in December that it was considering placing a cap on cross-border interchange fees.
The regulator has been very critical of Mastercard and Visa in recent months, stating that the payment giants have increased fees to an ‘unduly high level’. The PSR estimates that increases in cross-border interchange fees since 2021/22 have cost British businesses an extra £150-200m a year
Mastercard has found itself at the centre of a few legal trials due to its fees. Last month, the Competition Appeal Tribunal approved a £200m settlement between Mastercard and class representative Walter Merricks CBE.
Additionally, Harcus Parker called on larger UK companies in January to join its class action lawsuit against Mastercard and Visa. The firm claimed that businesses are being overcharged on interchange fees when customers pay via commercial cards.
Possible solutions
While legal cases around interchange fees continue to pop up around the world, stakeholders have started to look for long-term solutions. These solutions include exploring alternative payment methods, which have already achieved significant success in regions such as South America, Asia and Africa.
Brazil’s Pix is perhaps the most established example, with the instant payment platform being used by around 80% of the nation’s adult population.
Despite UK regulators pushing for a similar solution, consumers continue to prove that cards are the preferred method in the Western world. This was affirmed in UK Finance’s latest report, which showed the number of cards in circulation went up last year from 159.7 million the previous year.
One of the main reasons for consumers preferring cards is not only the familiarity but also certain features that have been exclusive to the payment method for a long time, such as Buy Now, Pay Later (BNPL).
However, card issuers may face growing competition, as Pix announced earlier this month the addition of BNPL.
