Dive Brief:

• The Securities and Exchange Commission disagrees with Discover's accounting approach to a credit card misclassification case, the card issuer and network said in an earnings report released on Wednesday.
• At issue is the way Discover is allocating misclassified card charges between revenue and expenses, the earnings report said. The report did not provide any further detail.
• "Management is working diligently to resolve their comments," Discover CFO John Greene said during prepared remarks in an earnings call with investors Thursday. The card network ended the earnings call without letting investors ask questions.

Dive Insight:

Bank and card issuer giant Capital One proposed a $35 billion acquisition of Discover earlier this year. The proposal is still pending, with federal regulators reviewing it. As part of that proposal, the companies filed a preliminary proxy with the Securities and Exchange Commission that has prompted the SEC’s concern.

“As part of its review of the joint proxy statement and prospectus, the Staff of the SEC has indicated that they disagree with certain aspects of Discover's accounting approach for the card misclassification matter,” Discover wrote in its earnings report.

In it’s comments to Discover, the SEC is focused on “the allocation of previously incurred card misclassification charges between revenue and expense,” the earnings report said.

An SEC spokesperson did not immediately respond to a request for comment. A Discover spokesperson said he could not provide any comment beyond what was written in the earnings report.

Beginning in 2007, the Riverwoods, Illinois-based company overcharged some credit card accounts by placing them into the highest merchant and merchant acquirer price tier.

The SEC is investigating the matter, Discover said in a regulatory filing last year. 

In July, Discover said it would set aside $1.2 billion to settle class action lawsuits from merchants who were overcharged. And in April, Discover executives said the card network would set aside an additional $799 million for remediation in the misclassification case.

Discover does not expect card misclassification charges to impact its performance for the year, Greene said during the earnings call, although he did not elaborate.

The company, which is a bank as well as a card network, said profits spiked in the past three months. Discover reported third-quarter net income rose by $282 million to $965 million over the same quarter in 2023, an increase of 41%.