What you need to know about Capital One's proposed acquisition of Discover

Capital One announced Monday 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 completed, 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.

Why now?

The deal, worth 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.

Capital One CEO Richard D. Fairbank said on a call with analysts Tuesday morning that the deal would help the combined company “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 payments receivable, and Discover was the nation's sixth-largest credit card issuer with $94 billion, according to data from Nilson Report, a newsletter that covers the payment sector follows. The merger would put 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, especially as Americans try to cover rising costs due to high inflation, and more and more merchants move away from using cash. Capital One issues cards on networks operated by Visa and Mastercard, and the acquisition of Discover would help the company expand its payments business.

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

Will the regulators approve it?

The two companies cannot merge without approval from banking regulators, the Justice Department and the Federal Trade Commission. Some big deals are moving forward without a hitch, but recent developments in the Biden administration's approach to mergers suggest Capital One and Discover could face real hurdles. The biggest question regulators will ask 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 been keeping a close eye on online payment providers. In 2020, the Justice Department filed a lawsuit to block a $5.3 billion merger between Visa and Plaid; the companies abandoned their plans shortly afterwards.

After approving a slew of deals over the past year in an effort to curb a crisis among midsize banks, financial regulators have already expressed a desire to be more selective in the mergers they approve. Last month, the Office of the Comptroller of the Coin, the regulator that oversees the nation's largest banks, proposed changes to the review process for evaluating bank mergers. If adopted, the changes would end the process of standardly granting approval after a certain period has passed since the merger was proposed, giving regulators more time to scrutinize any proposed transaction.

The Bank Policy Institute, a trade group, denounced the proposal as a “lengthy, opaque and uncertain supervisory process that prevents banks from even considering a possible merger,” while community groups hailed it as a necessary effort to bring more transparency and attention to the process.

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

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

What does this mean for Discover cardholders?

Account holders don't have to worry about any changes yet: regulators still have to sign off on the merger, just like the shareholders of each company.

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

“We are a long way from knowing how cardholder terms and conditions might change,” said Greg McBride, chief financial analyst at BankRate, a financial services company.

One question likely on regulators' minds is what Capital One decides to do with the Discover brand.

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

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