This story was originally published on Payments Dive. To receive daily news and insights, subscribe to our free daily Payments Dive newsletter.
The Federal Reserve Board and the FDIC have imposed a total of $250 million in civil penalties on Discover Financial Services for overcharging merchants on interchange fees and failing to tell them, the agencies said in separate consent orders.
The Fed issued its consent order, which included a $100 million civil penalty, on Friday. The FDIC said in a separate consent order that Discover bank — which is owned by Discover Financial Services — agreed on Tuesday to pay a $150 million civil penalty.
Within 60 days Discover is required to submit a plan to better oversee its interchange fee practices, the Fed order said. The consent order requirements were imposed by the Fed as a condition to its approval of Capital One’s $35 billion acquisition of Discover.
The Federal Reserve is taking action in coordination with the FDIC, the Fed said in a news release on Friday.
Over the course of nearly two decades Discover charged merchants commercial interchange fees for cards that were used for ordinary consumer spending, the order said. Commercial interchange fees are higher than consumer fees, according to the order.
The Riverwoods, Illinois-based bank and credit card issuer began overcharging merchants in 2007 and the practice continued through 2023, the Fed said.
Discover classified about five million consumer credit cards as commercial credit cards at the end of 2022 and 98% of those cards were misclassified, the Fed said in the filing.
The Fed’s order doesn’t say how much merchants were overcharged. The FDIC order requires Discover to make restitution to merchants and merchant acquirers of at least $1.23 billion. The initial FDIC order was disclosed in July 2023.
“For approximately 17 years, the Bank misclassified millions of consumer credit cards as commercial, resulting in higher interchange fees for transactions processed on the Discover network,” the FDIC said in Friday press release.
In July, Discover agreed to pay $1.2 billion to settle a class action lawsuit over card misclassification.
“Discover has since terminated these practices and is repaying those fees to affected customers,” the Fed said.
McLean, Virginia-based Capital One, which expects to complete its acquisition of Discover on May 18, agreed to comply with the Federal Reserve Board’s action against Discover, “including remediation requirements,” the release said.