On Wednesday, Discover Financial Services (DFS) revealed in a regulatory filing that The Federal Deposit Insurance Corp. (FDIC) is planning to take enforcement action against its banking division, Discover Bank in relation to its marketing policies for fee-based products.
Since December 2010, Discover has been facing several lawsuits which accuse it of keeping customers uninformed about their buying decisions pertaining to the company’s services.
According to the lawsuits, Discover made deceptive telemarketing calls to consumers offering them several optional, fee-based products, including an identity-theft protection plan, a credit-score tracker and a payment protection plan.
However, after informing consumers about the products, the company’s telemarketers used misleading and confusing terms, read scripts quickly, and also omitted disclosures related to the product, leaving consumers confused and misguided.
Amid the confusion, customers failed to realize that they were agreeing to buy the product and the telemarketers refrained from informing them about the purchase.
However, Discover changed its marketing policies after the first lawsuit was filed. Additionally, in June 2011, the company agreed to settle eight such class-action lawsuits but the settlement is yet to be approved by the court.
Over the past few months, FDIC has been investigating Discover’s marketing policies for various products including the payment protection plan and the identity-theft protection plan. The findings of the investigation have led to the FDIC’s decision of action against the company.
Earnings Review
On September 22, 2011, Discover reported third-quarter earnings per share of $1.18, dramatically ahead of both the Zacks Consensus Estimate of 91 cents and 47 cents recorded in the year-ago quarter. Net income also spiked substantially by over 148.7% year over year to $649 million from $261 million.
Moreover, Discover’s total revenue, net of interest expense, increased 4.6% year over year to $1.79 billion, also exceeding the Zacks Consensus Estimate of $1.48 billion.
Discover competes with other financial services companies such as Capital One Financial Corp. (COF) and SLM Corp. (SLM). The company currently caries a Zacks #2 Rank, implying a Buy rating in the short term.
