Discover’s Management Stresses New Action on Merchant And Banking Issues

Discover Financial Inc.’s top brass early Thursday stressed that the company’s top priorities are regulatory compliance, customer experience, and long-term growth. The declaration, from temporary chief executive John Owen, was meant to reassure equity analysts and came in the wake of merchant-overcharge and banking-compliance issues that led up to the departure on Monday of Roger Hochschild, a 25-year Discover executive who had been CEO since 2018.

Owen also lay stress on the Riverwoods, Ill.-based company’s efforts to find a new permanent CEO, hinting that his own tenure in the role will be short. Discover has hired a search firm, though Owen did not add further details about the matter. “We feel now is the right time to transition the CEO position,” he said. “We are acting with urgency in this process. We have a strong list of candidates, internally and externally.”

Owen in the meantime faces a number of other pressing issues, including news that emerged last month indicating his company had overcharged merchants for 16 years by misclassifying them into higher pricing tiers. The mistake forced Discover to set aside $365 million on its balance sheet to compensate merchants and acquirers.

The company, which owns Greenwood, Del.-based Discover Bank, is also faced with an expected consent order from the Federal Deposit Insurance Corp. related to the compliance issues. Chief financial officer John Greene said on Thursday’s call the order has not yet been received. “The proposed consent order from the FDIC is just that,” he said. “We’ll make it public at the appropriate time. There’s no news on the compliance front.” Owen, however, added Discover will act on the order “as quickly as possible.”

Greene told the analysts the company will spend $460 million covering compliance costs this year, following years in which, he said, the company had underinvested in the matter. “We’re paying the price now,” he said. “We’re ensuring we don’t put profits before compliance excellence.”

For next year, he said, “we would not expect [compliance costs] to go down. We’re not expecting any cost synergies in 2024.” Discover has already hired more than 200 compliance officers, he said, adding, “We still have a lot of work to do.”

Hochschild’s departure after a multi-decade tenure at Discover and related companies came as “the board felt it was the right time to make a change,” Owen said. The search for a new CEO is taking into consideration candidates who have “dealt with compliance issues at other companies,” he added. “We’re looking for someone who knows how to drive this business, grow this business.”