Insights

Discover Card Reclassification

Last July, Discover Financial Services disclosed it has been misclassifying the interchange qualifications on certain credit card accounts, dating back to 2007.  The misclassification impacted the amount of interchange fees merchants paid.  At the time of initial disclosure, Discover stated they were unsure of the total impact, but had set aside $365 million to provide refunds to impacted merchants and merchant acquirers. Specific details relating to which credit card categories were affected weren’t provided at the time. 

Like its peers Visa & Mastercard, Discover categorizes credit card interchange into several tiers.  The exact costs by tier will vary based on industry (Table 1).  Generally speaking, the most expensive cards are ‘Business’ cards and ‘Premium Plus’ consumer cards.  Consumer ‘Premium’, ‘Rewards’ and ‘Core Credit’ are its least expensive offerings.   

Optimized Payments, through its proprietary Harmonize Analytics platform, has been closely monitoring interchange qualification data related to this issue.  In November, significant changes in Discover interchange classification began to appear on our platform.  Figure 1 illustrates the historical sales mix by card category – the change in category mix has been dramatic.  Business cards (blue) historically accounted for 16% of all sales, but now comprise less than 1%.  Similarly, Consumer Rewards cards (green) saw a decline of 15 points, from 65% to 50%.  Sales volumes have shifted into the Premium (teal) and Premium Plus (red) categories, with increases of 15-points and 16-points, respectively.   

Figure 1. Source: Optimized Payents Harmonize Analytics

In their July announcement, Discover revealed that the total excess charges amounted to approximately 2 basis points of gross sales throughout the affected period. Optimized Payments data indicates that merchants are seeing reductions of 5 basis points, on average. However, the specific financial impact on each merchant will vary, influenced by their unique combination of card types and industry sector. Merchants in industries with a significant disparity in costs between Business cards and other types will benefit the most. This includes sectors like Grocery, Petroleum, Public Service (Government), Insurance, and Emerging Markets such as Cable/Streaming, Subscription Services, Schools, and Charitable Organizations. Conversely, industries like Retail and E-commerce might see minimal savings. 

Consider comparing Petroleum/Fuel and Retail-Ecomm industries.  Petroleum/Fuel Business rates are priced 65 basis points + $0.10 above all other card types, whereas Retail/Ecomm Business rates are 10 basis points less than Premium Plus consumer credit. Despite both sectors undergoing similar shifts in card mix, Retail-Ecomm costs were stable overall, while Petroleum/Fuel costs have shown a notable decline of 12 basis points (Figure 2).   

Another important factor to take into account is the extensive duration of this issue, spanning a total of 16 years. While Discover asserts they lack data dating back that far, we’ve diligently maintained Harmonize Analytics since 2010, thereby possessing Discover data for a significant period. It’s crucial to recognize the fluctuations in rates and the evolving card mix throughout this prolonged timeframe. 

Figure 2. Source: Optimized Payents Harmonize Analytics

As for reimbursement for past overcharges, Discover has not yet disclosed a formal procedure. Several large merchants who deal directly with Discover have begun receiving notification letters regarding refunds. It’s important to note that Discover’s calculations may not always be precise and can be contested with additional data and insights. This could mean that you are missing out on significant savings in your current proposal.   

Merchants with direct ties to Discover who haven’t received refund notifications should reach out to Discover directly. Those who process Discover transactions through an acquirer should contact their acquirer for details about refunds. 

How Optimized Payments Can Help

The world of payment processing is intricate, and Optimized Payments stands ready to assist. We have aided major clients like Apple, Verizon, Staples, and Charter Communications, helping them save over $1 billion in card processing fees through our Harmonize Analytics. If you’re interested in understanding more about the Discover Misclassification issue and its impact on your business, we encourage you to contact us at questions@optimizedpayments.com. 

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