Feb 20, 2024 - Economy

Regulators' dilemma

Animated illustration of a credit card machine flashing dollar bill signs.

Illustration: Aïda Amer/Axios

Capital One's $35.3 billion deal to acquire Discover presents a conflict for competition regulators, Axios' Pete Gannon writes.

Why it matters: The combination raises concerns in one area, but it could offer a solution in another.

Zoom in: The proposed deal could create the largest credit card issuer in the U.S., accounting for 20% of outstanding card loans in the U.S., BofA analyst Mihir Bhatia notes today.

  • That's bad timing politically, with bank M&A under scrutiny and Americans' card balances — and rates — increasing after years of soaring inflation.

On the other hand, there's another part to this deal — Discover's credit card network.

  • Visa and Mastercard dominate here with nearly 80% of that market, which sets fees with merchants to process payments from customers.
  • There are only two other players, American Express and Discover, and Discover is the smallest in the U.S.

Between the lines: Capital One CEO Richard Fairbank made clear on a conference call today that increasing the scale of Discover's network and making it competitive with the leading networks are major drivers of the deal.

  • The result from that, he notes, is increased value "to merchants, small businesses and consumers."

Zoom out: While a decision is likely months away, Capital One, like any large acquirer, has surely held preliminary discussions with regulators. But Fairbank wasn't tipping his hand on this morning's call.

The bottom line: It might come down to which market regulators feel could be hurt — or benefit — the most.

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This story was an excerpt from Axios Closer, a recap on the day's biggest business stories.

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