Economy

Capital One Discover offer: what you need to know

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Capital One announced Monday the acquisition of 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 first overcome regulatory scrutiny.

Here’s what you need to know about Capital One and Discover’s potential mega-deal, 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, chief executive of Capital One, said Tuesday morning on a call with analysts that the deal would help the combined company “compete more effectively with some of the largest banks and payments companies in the USA “.

Capital One was the nation’s fourth-largest credit card issuer last year, with $122.9 billion in outstanding debt, and Discover was the nation’s sixth-largest credit card issuer with $94 billion, according to data from Nilson Report, a newsletter that tracks the payments industry. 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 skyrocketed, especially as Americans try to cover rising expenses due to high inflation and more sellers abandon the use of cash. Capital One issues cards on networks run by Visa and Master Card, and acquiring Discover would help it expand its payments operations.

The transaction is likely to attract the attention of regulators who worry that megadeals will give even more power to large financial institutions to set higher rates, said David Robertson, the publisher of the Nilson report.

The two companies cannot merge without approval from banking regulators, the Justice Department and the Federal Trade Commission. Some large deals are going off without a hitch, but recent developments in the Biden administration’s approach to mergers suggest that Capital One and Discover may face real obstacles. The biggest question regulators will ask is whether the combined company will have too much influence over prices and availability of services in the market in which it operates.

Antitrust authorities are closely monitoring online payment providers. In 2020, the Justice Department sued to block a $5.3 billion merger between Visa and Plaid; the companies abandoned their plans shortly afterward.

After approving a series of deals over the past year to try to ease the crisis at midsize banks, financial regulators have already signaled a willingness to be more selective about the mergers they approve. Last month, the Office of the Comptroller of the Currency, the regulator that oversees the nation’s largest banks, proposed changes to its process for reviewing bank mergers. If adopted, the changes would end the default approval process after a certain amount of time has passed since the merger proposal, giving regulators more time to review each proposed transaction.

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

Jesse Van Tol, executive director of the National Community Reinvestment Coalition, a group that works with banks to address community needs and which opposes the merger, said that “historically, industry consolidation has not leads to better prices for consumers. Senator Elizabeth Warren, Democrat of Massachusetts, called for the regulations to be kill the deal.

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

Account holders don’t yet have to worry about any changes that might come: regulators still need to approve the merger, as shareholders of each company.

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

“We are far from knowing, and even further from actually seeing, how cardholder conditions may change,” said Greg McBride, chief financial analyst at BankRate, a financial services company.

One question that likely concerns regulators 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 not make much difference to market concentration.

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