Discover Looks to a Resolution of Regulatory And Merchant Pricing Snafus

The top management at Discover Financial Inc. said early Thursday its issues with regulatory compliance and merchant overcharges continue to cast a shadow over the company but could be on the way to being solved.

The problems, which included misclassification of merchants resulting in overcharges for card acceptance, came to light over the summer and led to the departure of long-time chief executive Roger Hochschild. On Thursday, the company’s temporary CEO told equity analysts a resolution of the matter won’t be quick. “We’re engaging with our merchant partners,” said John Owen, who took over from Hochschild while the Riverwoods, Ill.-based company seeks a new permanent CEO.

Discover had earlier disclosed it had misclassified merchants into higher pricing tiers over a span of 16 years. In response, the company set aside $365 billion on its balance sheet to compensate merchants and acquirers.

Untangling the mess “will be complex and will take several quarters to resolve,” said Owen. But neither Owen nor chief financial officer John Greene offered further details concerning how Discover is planning to satisfy the affected merchants.

Meanwhile, the company is grappling with compliance problems at Greenwood, Del.-based Discover Bank that dominated its last earnings call in August. Again, top management offered few details but sounded optimistic tones. “We have made significant improvements” in compliance, Owen offered. Discover earlier this month agreed to make improvements to address consumer-compliance and corporate-governance issues following a consent order from the Federal Deposit Insurance Corp. “We continue to build out our compliance capabilities,” Greene said on Thursday’s call. “That work is substantially complete. We’re waiting to hear back from the regulators.”

Third-quarter transaction volume for Discover was strongest at its Pulse network. The network, which operates an ATM network and processes debit card payments made in stores, posted $72.1 billion in transaction volume, up 14% year-over-year. Meanwhile, volume on the Discover network grew 1% to reach $57.2 billion. Diners Club activity came to $9.7 billion, up 11%, while the company’s network partners posted $9.9 billion in volume, a 17% drop.

For the quarter, Discover reported $4.04 billion in revenue, up 17% year-over-year. Net income dropped by one-third, to $683 million. The results came as the card company seeks a permanent chief. “The board is considering several excellent candidates, internally and externally,” Owen said. The new CEO, he added, should be in place “in coming months.”