Discover to pay merchants $1.2 billion for credit card fee overcharges

The Federal Deposit Insurance Corporation last month announced three orders against Discover Bank, Greenwood and its parent that resulted in a nearly $1.4 billion settlement.

The bulk of that amount will go to merchants who were overcharged on interchange fees paid for credit card transactions. The charges are a sore point with merchants, with some businesses now charging fees for customers using plastic. Issuers argue that the fees are recouped because customers feel free to spend more at restaurants, stores and other businesses.

The FDIC's order requires a restitution plan to distribute at least $1.225 billion to affected merchants, and a $150 million civil money penalty.

The FDIC determined that:

For about 17 years, the bank misclassified millions of consumer credit cards as commercial, resulting in higher interchange fees for transactions processed on the Discover network.As a result of the bank's misclassification, merchants were overcharged over $1 billion in interchange fees when accepting payments with the misclassified credit cards.

In a related action, the Board of Governors of the Federal Reserve System issued an order requiring corrective action and assessing a civil money penalty of $100 million against the Bank's parent holding company, Discover Financial Services, Riverwoods, IL, and its subsidiary, DFS Services LLC.

Discover Bank Greenwood in Sussex County came as a result of the bank's Delaware entrance under the Financial Center Development. The FCDA took away credit card interest caps and led to banks setting processing and credit card operations in the state. Most of Discover's operations are in northern Delaware.

Capital One, which has operations in northern Delaware, is expected to complete the acquisition of Discover, this month in a $35 billion stock deal.

A drawing card for Capital One was Discover's credit card merchant processing operation.

Final order:

Discover Bank Enforcement Order (PDF)