The folks at Discover Card not only have to fork over $200 million in refunds to consumers who were purportedly fast-talked or downright deceived by telemarketers pitching such add-ons as payment protection and credit score tracking for monthly fees, it also has to pay a $14 million fine to regulators at the Federal Deposit Insurance Corporation (FDIC) and Consumer Financial Protection Bureau (CFPB).
An “agreement in principle” reached yesterday also “calls for certain enhancements to the company’s marketing practices,” Discover says, including having an independent auditor oversee its compliance with the consent order. But worst of all, perhaps, it must endure scorching headlines this morning like this one on the Christian Science Monitor’s website: “Discover: The Card That Pays You Back After Fleecing You.” (Okay, it'll get over it.)
More than 3.5 million Discover consumers who paid for one or more of the products covered by the agreement between Dec. 1, 2007, and Aug. 31, 2011 will dice up the refund pool depending on what they paid. “Anyone affected by this order will automatically receive a credit to their account, or, if they’re no longer a Discover customer, they’ll receive a check in the mail or have any outstanding balance reduced by the amount of the refund,” according to the CFPB’s homepage.
For example, the cost of a wallet protection product was $2.99 a month during the enforcement period…,” explains Detroit Free Press consumer columnist Susan Tompor. Other services cost $9.99 a month, she points out, and some fees could have been higher depending on the customer’s balance. “Discover's payment protection plan is calculated at 89 cents per month for every $100 of balance on the credit card -- or $13.35 a month on a $1,500 balance.”
The regulators charge that scripts for Discover's telemarketers “contained misleading language likely to deceive consumers about whether they were actually purchasing a product.” The details of the charges, remedies and agreement are outlined in a CFPB press release here; the full text of the 29-page consent order dated yesterday is downloadable here.
"Banks have been doing this for years, but we never had a regulator who protected consumers before," Ed Mierzwinski, director of the consumer program for the U.S. Public Interest Research Group, tells Jim Puzzanghera of the Los Angeles Times.
But Discover denies that it did anything untoward; it just wants to move forward in its relationship with consumers.
“We have worked hard to earn the loyalty of our cardmembers, and we are committed to marketing our products responsibly,” says chairman and CEO David Nelms in a statement. “As always, we will continue to strive to deliver the highest standards of customer service and satisfaction.”
Isaac Boltansky, a policy strategist with Compass Point Research & Trading, says that the regulators’ crackdown will reduce the revenue that card companies make from add-on products. “The whole market for these is going to shrink,” he tells Bloomberg’s Carter Dougherty. “It has to. We have to expect restraints on these products.”
Discover spokesman Jon Drummond tells Dougherty that “our current intention is to continue to market these products,” but he would not comment specific plans.
In a Market Watch commentary, Wall Street columnist David Weidner writes that the CFPB’s honcho, Richard Cordray, “is clearly the driving force behind” the settlement, as well as an earlier one with Capital One and an unresolved investigation of an American Express’ subsidiary, Centurion Bank.
“It doesn’t matter if Discover, American Express or Capital One really engaged in deceptive practices. In cases such as these, it’s often easier and cheaper to not fight city hall,” Weidner writes. “And that’s really the part that neither side will talk about honestly. The CFPB, like any agency, can be tempted to enforce for the sake of enforcing. And banks may or may not be guilty of the infractions.”
The agreement between Capital One and the Consumer Financial Protection Bureau in July was greeted with skepticism by at least two of our readers, who felt it was just a slap on the wrist. What do you think? Is the CFPB’s ongoing vigilance likely to have any effect on deceptive marketing practices or will it be pooh-poohed as the cost of doing business for a couple of companies that happened to get nailed? Or is the CFPB just on a witch hunt, as the banking industry feared in opposing the creation of the agency in the first place?