Discover Earnings: Compliance Issues Mar Decent Earnings As Share Repurchases Paused

Narrow-moat Discover Financial reported solid results in line with our expectations. However, the bank’s generally decent results were overshadowed by news that Discover has been overcharging the merchants who accept its cards by misclassifying card types. The affected amount of revenue is limited, less than 1% of cumulative transaction fees since 2007, and the firm has set aside $365 million for estimated merchant compensation. However, Discover has once again paused share repurchases as it reviews its corporate governance and compliance policies. Discover also announced it has received a proposed consent order from the Federal Deposit Insurance Corporation in connection with customer compliance, which is a separate matter from the card misclassification issue.