Discover Financial Services (DFS:US) will continue to sell credit-card add-on products subject to new restrictions under a $214 million settlement with U.S. regulators, according to Jon Drummond, a company spokesman.
The company, which is scheduled to release third-quarter financial results Sept. 27, must meet 15 pages of requirements, down to the font size of disclosures delivered to consumers under a consent order signed today with the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau.
Under the accord, Discover will refund $200 million to more than 3.5 million consumers who were charged for four products from Dec. 1, 2007 to Aug. 31, 2011. Regulators said the company used deceptive marketing in selling the products -- credit score tracking, and protection against identity theft, stolen cards and catastrophic events such as job loss. Discover, which announced the settlement on Sept. 21, also will pay $14 million in fines to be split between the FDIC and CFPB.
“Our current intention is to continue to market these products,” Drummond said in a telephone interview. He declined to comment further on the company’s plans.
Discover, based in Riverwoods, Illinois, earned $428.2 million from card add-ons in 2011, a year in which it had net income of $2.2 billion, according to Drummond. Of that total, $101.7 million was from identity theft products, he said.
Isaac Boltansky, Washington policy strategist with Compass Point Research & Trading LLC, said the effect of the regulators’ crackdown will be to reduce the revenue card companies make from add-on products.
“The whole market for these is going to shrink,” Boltansky said in an interview. “It has to. We have to expect restraints on these products.”
Capital One Financial Corp. (COF:US), which agreed to a $210 million settlement with CFPB and the Office of the Comptroller of the Currency on July 18 over add-on products, announced the next day it would no longer market them.
“We have no intention to sell these card add-on products in the future, because the economics of our credit card business does not depend on revenues from add-on products, and we have a lot of opportunities to grow our franchise in other ways,” Capital One Chief Executive Officer Richard Fairbank said on July 19.
Discover deceived consumers by suggesting they wouldn’t be charged for the products until they reviewed printed materials, or enrolled customers without their consent, according to the the CFPB and FDIC. Other times, marketers deliberately spoke too quickly for consumers to understand, the regulators said.
Kent Markus, the CFPB’s assistant director of enforcement, said his agency isn’t passing judgment on the products, only on the manner in which they were sold.
“Consumers can’t make good decisions about whether they want to buy something or not if they are deceived in the process of it being sold to them,” Markus said today during a conference call with reporters.
Boltansky said the consumer bureau has a strong incentive not to hint at any disapproval of the products because critics including congressional Republicans have accused the agency of dictating Americans’ credit choices.
“They don’t want to be perceived as having the power to eliminate these products,” Boltansky said.
Richard Cordray, the CFPB’s director, said companies should anticipate similar action in the future, and do their best to guard against it.
“We continue to expect that more such actions will follow,” Cordray said during the conference call. “In the meantime, we are signaling as clearly as we can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services.”
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