Capital One Discover Deal: What to Know

Capital One announced on Monday that it would acquire Discover Financial Services, in a deal to combine two of the largest credit card companies in the United States. But before the transaction can be consummated, the deal must overcome regulatory scrutiny.

Here’s what you need to know about Capital One and Discover’s potential megadeal, and what it could mean for consumers.

The deal, valued at more than $35 billion, would give Capital One access to a credit card network of more than 300 million cardholders, adding to its existing customer base of 100 million.

Richard D. Fairbank, the chief executive of Capital One, said on a call with analysts Tuesday morning that the deal would help the combined enterprise “compete more effectively against some of the largest banks and payments companies in the United States.”

Capital One was the nation’s fourth-largest credit card issuer last year, with $122.9 billion in outstanding receivable payments, and Discover was the nation’s sixth largest with $94 billion, according to data from Nilson Report, a newsletter that tracks the payment industry. The merger would place the two companies above last year’s largest issuer, JPMorgan Chase, which had $191.4 billion in credit card loans.

Credit card debt in the United States has soared, particularly as Americans try to cover rising expenses as a result of high inflation, and more vendors are shifting away from using cash. Capital One issues cards on networks run by Visa and Mastercard, and acquiring Discover would help it expand its payment operations.

The transaction is likely to draw scrutiny from regulators who are concerned that megadeals would give larger financial institutions even more power to set higher rates, said David Robertson, the publisher of the Nilson Report.

The two companies cannot merge without getting a sign-off from bank regulators, the Justice Department and the Federal Trade Commission. Some big deals go through without a hitch, but recent developments in the Biden administration’s approach to mergers suggest that Capital One and Discover might face real hurdles. The biggest question regulators will consider is whether the combined company will have too much influence over the pricing and availability of services in the market in which it operates.

Antitrust officials have kept a close eye on online payments providers. In 2020, the Justice Department sued to block a $5.3 billion merger between Visa and Plaid; the companies abandoned their plans soon after.

After approving a flurry of deals over the past year to try to tamp down a crisis among midsize banks, financial regulators have already signaled a desire to be more selective about the mergers they approve. Last month, the Office of the Comptroller of the Currency, the regulator overseeing the country’s largest banks, proposed changes to its review process for evaluating bank mergers. If adopted, the changes would end the process of granting approval by default after a certain period has passed since the merger was proposed, giving regulators more time to scrutinize each proposed transaction.

The Bank Policy Institute, a trade group, decried the proposal as a “lengthy, opaque and uncertain supervisory review process that discourages banks from even contemplating a potential merger in the first place,” while community groups hailed it as a necessary effort to bring more transparency and consideration to the process.

Jesse Van Tol, chief executive of the National Community Reinvestment Coalition, a group that works with banks to meet community needs and that opposes the merger, said “historically, the consolidation of the industry has not led to better prices for consumers.” Senator Elizabeth Warren, Democrat of Massachusetts, has called on regulators to kill the deal.

The Consumer Finance Protection Bureau published a report last week that found larger issuers, like Capital One, charged higher annual rates than their smaller counterparts, like regional banks and credit unions, which the agency said was fueled by a lack of competition in the industry.

Account holders do not have to worry about any changes happening just yet: Regulators still have to sign off on the merger, as do shareholders of each company.

Mr. Fairbank said on a call with investors that the deal was expected to be completed in late 2024 or early 2025.

“We’re a long way from knowing, and an even longer way from actually seeing, how cardholder terms may change,” said Greg McBride, chief financial analyst at BankRate, a financial services company.

One question that is likely to be on regulators’ minds is what Capital One chooses to do with the Discover brand.

Mr. Robertson said the deal was unlikely to change much for existing Discover users and that regulatory action to stop the transaction would do little to change market concentration.

“If regulators wanted to do something, they should have acted years and years ago to create more competition,” Mr. Robertson said.

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