Dive Brief:

• Discover Financial Services’ compliance and risk management spending for this year is nearing $500 million, and the card issuer also expects to spend that amount in 2024, although it “could be more than that, certainly,” CFO John Greene said last week.
• As it’s grappled with regulatory scrutiny, Riverwoods, Illinois-based Discover has put in “a lot of work” to address compliance issues, Greene said Dec. 5 during the Goldman Sachs U.S. Financial Services Conference in New York. The company has increased compliance and risk management spending by $300 million since 2019.
• “We’re going to continue to invest whatever we have to invest in order to get the compliance issues behind us,” Greene said. “We’ll hopefully have dealt with most of the major issues in terms of identification and then remediation by the midpoint of 2024.”

Dive Insight:

Discover’s compliance spending this year has soared as the company faced increased attention from regulators over multiple issues. In August, Greene had said the company was set to spend about $260 million on compliance this year. Then, during Discover’s third-quarter earnings call in October, interim CEO John Owen said the company was on track to spend about $460 million. 

Ultimately, the card company is focused on creating a sustainable compliance management process and systems to meet regulators’ expectations, Greene said Dec. 5.

Discover reached a consent agreement with the Federal Deposit Insurance Corporation in September in connection with a consumer compliance probe at its subsidiary, Discover Bank. Discover also disclosed a card misclassification issue in July that affected merchants and merchant acquirers, and the Securities and Exchange Commission is investigating that issue.

The company’s student loans business is another area that’s run into regulatory trouble. Discover said last month that it’s pursuing a sale of its $10.4 billion student loan portfolio. That business has “had perennial issues in our ability to service that portfolio,” Greene said.

Greene pointed to the Consumer Financial Protection Bureau’s 2015 consent order, which alleged Discover misstated minimum amounts due on billing statements for student loans; misstated tax information required for certain tax benefits; and engaged in illegal debt collection. In 2020, Discover signed another consent order with the CFPB and agreed to pay $35 million after the company violated the prior order. 

September’s consent agreement with the FDIC “also contained some elements” related to the company’s student loan business, Greene added.

“We found that our internal systems capabilities weren’t on par with what a professional servicing organization could do for this portfolio,” Greene said.

The company weighed keeping and fixing the business unit – “we ruled that out,” Greene said – or outsourcing servicing and retaining the portfolio, but “the economics of that decision relative to a full exit weren’t equal,” Greene said. 

The company is targeting the midpoint of next year to exit the student loan business, he said. When it comes to a buyer, Discover aims to “choose a bonafide servicer that has dealt with loans of this nature, and it also had dealt with loans that are subject (to) consent order, and we believe we’re pretty close to finding one,” Greene said. 

Fully exiting the business presents an opportunity “to execute a gain on sale in that portfolio and actually create $1.5 billion to $2 billion worth of capital that we can invest in the business” or return to shareholders, he said. He also mentioned $900 million in reserves for that business that will be released.

As far as further financial impact from the sale, “the aspects are certainly our resources, and our ability to kind of resize the organization,” Greene said. 

He went on to say that the company’s first priority “will be to take resources and redeploy those into open positions,” and then “we’re going to size it and work to be what I’ll say (is) fiscally astute in terms of kind of managing the cost profile of the business.” 

A Discover spokesperson declined to comment when asked for more detail on Greene’s remarks or how many employees work in Discover’s student loans unit. Discover had 20,200 employees as of the end of last year, according to its annual filing with the SEC.