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Between the antitrust lines of Capital One's Discover deal

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Feb 20, 2024
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Capital One agreed to buy Discover in an all-stock transaction valued at $35.3 billion, the two companies announced Monday.

Why it matters: The deal will be a bellwether of regulatory appetite for financial services deals.

What's happening: Capital One is the ninth-largest bank in the U.S. by assets — a status that puts it under significant regulatory scrutiny — and the two together would become the largest card issuer in the market by loan volume.

  • Discover, meanwhile, has been battered by scandal and compliance issues. The FDIC issued it a consent order in September, saying Discover had failed to establish a compliance system that met consumer protection laws.
  • "For these considerations, we believe the deal could face significant hurdles to getting done," TD Cowen managing director Moshe Orenbuch wrote in a note.
  • "Recently, the OCC has published guidance on approving bank mergers, and the Comptroller has said banks with outstanding enforcement actions will have trouble getting deals approved," he added, noting the FDIC is Discover's prudential regulator.

What they're saying: "We, of course, kept them informed along the way of the process," Capital One CEO Richard Fairbank said in a morning call today when asked about being in contact with regulators regarding the tie-up.

Between the lines: Aside from being a card issuer, Discover is also a card network — the smallest of the four (Visa, Mastercard and American Express being the others).

  • Nilson Report estimates that it holds 2.1% of the U.S. card network market share by purchase volume.
  • That could work in favor of a deal, at a time when concerns over the Visa-Mastercard duopoly are just as strong in Congress.
  • "Antitrust concern would be concentrated on the issuing side and... the opposite of that is on the network side," says Orenbuch.

The U.S. Senate took aim at the two last year, with Senate Majority Whip Dick Durbin (D-Ill.) recently pushing a bill that would require banks to offer multiple payments networks with their credit cards in an effort to combat fees.

  • "The Visa-Mastercard duopoly controls over 80 percent of the U.S. credit card network market," he wrote. He notably exempted networks that are issuers (like Discover and American Express) from the proposed rule.
  • Capital One uses both Visa and Mastercard for different card products. It also plans to migrate its entire debit business, along with some cards, to Discover.

What we're watching: The companies say the deal is expected to close in late 2024 or early 2025, pending regulatory approval.

Context: Regulators have been especially tough on megamergers under the current administration. The Department of Justice sued to block the JetBlue-Spirit amalgamation and scuttled the Adobe-Figma deal.

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