Discover Makes a Mistake

There are serious mistakes, and then there are the really serious mistakes you can’t recover from if you’re the top honcho. Discover Financial Services proved that last month with the departure of Roger Hochschild, who had been an executive at Discover for 25 years and chief executive for five.

Discover announced Hochschild’s departure weeks after the card network’s disclosure in a July earnings call that it had set aside $365 million on its balance sheet to compensate merchants and acquirers that the network had been overcharging for transactions. The practice, which involved misclassification of certain cards into higher-rate tiers, dated as far back as 2007, company executives said on the July call.

Exacerbating the circumstances around this disclosure is that card-acceptance fees for credit and debit are historically a sore point for merchants of all sizes. The issue has been on the boil lately, leading to legislation now before Congress that would require issuers to make two unrelated networks available for credit card transactions. One of the networks can’t be Visa if the other is Mastercard, and vice versa. The legislation has far-reaching implications, especially for networks like Discover. For more on this bill, called the Credit Card Competition Act, see our cover story on page 24.

In this sense, Discover’s disclosure couldn’t have come at a worse time for opponents of such would-be legislative solutions to the acceptance-cost issue. Industry experts, indeed, doubt the management shakeup, coupled with the compensation allowance, will placate merchants. “It’s a hot, hot [topic], and somebody has to go on the chopping block,” a veteran processing consultant told us, while asking not to be identified. “But I don’t think that one sacrificial lamb will be enough. It’s another nail in the coffin of interchange.” Interchange refers to the percentage of each transaction merchants pay to bank card acquirers and card companies like Discover and American Express.

For its part, Discover’s board did not comment on the overcharge imbroglio in announcing the management change. “The board and Roger have agreed that now is the right time to transition leadership” said board chairman Tom Maheras, in a terse statement.

John Owen, a retired banker and member of Discover’s board of directors, has been appointed interim chief executive and president while the company seeks a permanent replacement. Time will tell if Owen can help calm the waters in the meantime.

—John Stewart, Editor john@digitaltransactions.net