Discover Stock Plunges After Admitting it Overcharged Merchants, Discloses Regulatory Probe

Shares of Discover plunged Thursday after the credit card issuer disclosed a $365 million error and regulatory probe the day before.

The financial services company on Wednesday revealed in its second quarter earnings that it has been overcharging merchants since mid-2007 due to a classification error, and that the matter is under investigation by the Federal Deposit Insurance Corp.

Discover stock fell nearly 16% to $102.45 a share on Thursday. Year-to-date, the stock is still up about 4.4%.

The company said the mistake came from classifying certain credit-card accounts into the highest merchant pricing tiers. This affected businesses but not cardholders.

"Management is taking actions to correct the card product misclassification going forward and to prepare a program to compensate affected direct merchants and merchant acquirer," the company said.

The mistake was not material to Discover's financial statements, the company said, and it estimated that its liability to repay merchants totaled $365 million. "However, given differences in individual merchant agreements, changes in network terms, and availability of historical data, it is difficult to determine the final amount of potential refunds at this time," the company said.

Discover's second quarter earnings report was otherwise strong. It said it earned $901 million, or $3.54 a share, in the second quarter, compared with $1.1 billion, or $3.93 a share, during the same quarter last year. Revenue rose 21% to $3.9 billion.