Discover Faces FDIC Action - Analyst Blog
September 30 2011 - 10:37AM
Zacks
On Wednesday, Discover Financial Services (DFS)
revealed in a regulatory filing that The Federal Deposit Insurance
Corp. (FDIC) is planning to take enforcement action against its banking division,
Discover Bank in relation to its marketing policies for fee-based
products.
Since December 2010, Discover has been facing several lawsuits
which accuse it
of keeping customers uninformed about their buying decisions
pertaining to the company’s services.
According to the lawsuits, Discover made deceptive telemarketing
calls to consumers offering them several optional, fee-based
products, including an identity-theft protection plan, a
credit-score tracker and a payment protection plan.
However, after informing consumers about the products, the
company’s telemarketers used misleading and confusing terms, read
scripts quickly, and also omitted disclosures related to the
product, leaving consumers confused and misguided.
Amid the confusion, customers failed to realize that they were
agreeing to buy the product and the telemarketers refrained from
informing them about the purchase.
However, Discover changed its marketing policies after the first
lawsuit was filed. Additionally, in June 2011, the company agreed
to settle eight such class-action lawsuits but the settlement is
yet to be approved by the court.
Over the past few months, FDIC has been investigating Discover’s
marketing policies for various products including the payment
protection plan and the identity-theft protection plan. The
findings of the investigation have led to the FDIC's decision
of action against the company.
Earnings Review
On September 22, 2011, Discover reported third-quarter earnings
per share of $1.18, dramatically ahead of both the Zacks Consensus
Estimate of 91 cents and 47 cents recorded in the year-ago quarter.
Net income also spiked substantially by over 148.7% year over year
to $649 million from $261 million.
Moreover, Discover’s total revenue, net of interest expense,
increased 4.6% year over year to $1.79 billion, also exceeding the
Zacks Consensus Estimate of $1.48 billion.
Discover competes with other financial services companies such
as Capital One Financial Corp. (COF) and
SLM Corp. (SLM). The company currently caries a
Zacks #2 Rank, implying a Buy rating in the short term.
CAPITAL ONE FIN (COF): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis Report
SLM CORP (SLM): Free Stock Analysis Report
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