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In a significant regulatory enforcement action, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board have jointly penalized Discover Financial Services and its subsidiaries—Discover Bank and DFS Services LLC—for systematically misclassifying consumer credit cards as commercial products. The misclassification, which spanned 17 years, led to inflated interchange fees for merchants processing payments via the Discover network.
According to the FDIC’s announcement on April 16, 2025, Discover Bank has been ordered to pay $1.225 billion in restitution alongside a $150 million civil money penalty, marking one of the largest enforcement actions in recent memory related to financial compliance violations. The misclassification affected millions of accounts and contributed to more than $1 billion in excessive interchange fees, undermining fair merchant transaction practices.
“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,” the FDIC stated.
The restitution will be disbursed to impacted merchants, merchant acquirers, and other intermediaries adversely affected by Discover’s regulatory compliance failure.
In a parallel action, the Federal Reserve Board issued a consent order against Discover Financial Services and its subsidiary DFS Services LLC, mandating corrective actions and imposing a $100 million civil money penalty. The Federal Reserve’s enforcement covered the period from 2007 to 2023, during which the improper interchange fee charges occurred.
The regulatory action highlights long-standing lapses in compliance management systems and underscores the importance of accurate product classification in mitigating financial risks and maintaining trust within the payments ecosystem. The penalties also reflect increasing regulatory scrutiny over internal controls, compliance workflow efficiency, and regulatory reporting accuracy in the financial services sector.
Discover has acknowledged the violations, noting in a statement to PYMNTS that it has been actively working with regulators to resolve the matter and is fully cooperating in implementing the necessary remediation measures.
“Discover has since terminated these practices and is repaying those fees to affected customers,” the Federal Reserve said, confirming that the institution has begun addressing the compliance gaps identified.
Adding further weight to the regulatory developments, the Federal Reserve simultaneously approved Capital One Financial’s acquisition of Discover Financial Services, a deal that includes the indirect acquisition of Discover Bank. As part of the conditions for the merger, Capital One has committed to upholding the Federal Reserve’s enforcement actions and completing all remediation requirements.
“Capital One has received all the necessary regulatory approvals to complete the merger and expects to finalize the transaction by May 18, 2025, subject to standard closing conditions,” the company confirmed in a statement.
The Discover case offers a critical reminder of the consequences of compliance risk assessment failures and the need for continuous investment in RegTech solutions, compliance analytics, and regulatory compliance software to proactively identify and rectify vulnerabilities in financial operations.
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