(Bloomberg) -- Discover Financial Services slumped in late trading after the lender disclosed that it was in discussions with regulators over how it misclassified some of its credit cards.
The company will suspend buybacks while it begins an internal review of compliance, risk management and corporate governance, Riverwoods, Illinois-based Discover said Wednesday in a statement. The stock tumbled 13% to $106.02 at 5:51 p.m. in extended trading in New York.
Discover said that it misclassified certain credit-card accounts into its highest pricing tier, starting in 2007, meaning merchants were charged more than they should have been to accept the cards for payment. The resulting incremental revenue amounted to less than 1% of its cumulative interchange income — the money it collects from merchants each time a consumer swipes a card at checkout.
The lender said it’s discussing the matter with regulators and warned it could face future regulatory actions. Additionally, Discover said it received a proposed consent order from the Federal Deposit Insurance Corp. for a consumer compliance issue that’s separate from the misclassification matter.
“We are actively enhancing our governance and oversight structures and are making significant investments in our compliance management system,” Chief Executive Officer Roger Hochschild said in the statement. “We remain deeply committed to achieving excellence in all these areas.”
Buybacks Halted
It’s the second time in a year that the company had to suspend share repurchases over compliance concerns.
Last year, Discover temporarily paused stock buybacks after it started an internal investigation into practices within its student-loan servicing business. Four months later, it started buying shares again after completing that review, noting it would continue to communicate with regulators about the unit’s practices.
Second-quarter profit, meanwhile, dropped 18% to $901 million. While that topped Wall Street estimates, Discover had to set aside $1.31 billion in provisions for souring loans as write-offs surged in the period. That figure was larger than analysts predicted.
Discover said its management team would prepare a program to compensate merchants affected by the misclassification issue, setting aside $365 million to provide refunds to retailers and payment processors.
“Given differences in individual merchant agreements, changes in network terms, and availability of historical data, it is difficult to determine the final amount of potential refunds at this time,” Discover said in the statement, noting that its board has retained a law firm to work on the matter.
(Updates with buyback program in seventh paragraph, profit drop in eighth.)
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