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Whether Capital One can put Discover in its wallet hinges on how US regulators react

Capital One’s (COF) $35 billion purchase of Discover (DFS) would create one of the largest US credit card companies and a formidable new rival to American Express (AXP), Visa (V), and Mastercard (MA).

The question now is whether regulators will let it stand.

The deal offers a test of how the Biden administration will treat a union of two financial giants at a time when a lot of other mergers hang in the balance due to antitrust reviews, from the tie-ups of air carriers Alaska (ALK) and Hawaiian (HA) to grocery chains Kroger (KR) and Albertsons (ACI) to amusement park giants Six Flags (SIX) and Cedar Fair (FUN).

"Currently, the big card networks in the US are Visa, Mastercard, Amex, and Discover," said Brian Quinn, a professor at Boston College Law School. "Any merger among those networks would definitely draw a high degree of scrutiny by regulatory agencies."

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Read more: Capital One review: A wealth of personal finance products and credit-monitoring tools

FILE - A branch office of Capital One Bank is pictured on May 7, 2009, in New York. Capital One Financial is buying Discover Financial Services for $35 billion, in a deal that would bring together two of the nation's biggest lenders and credit card issuers, according to a news release issued by the companies Monday, Feb. 19, 2024. (AP Photo/Mark Lennihan, File)
Capital One would likely become the biggest credit card lender in the US if regulators sign off on its purchase of Discover. (AP Photo/Mark Lennihan, File) (ASSOCIATED PRESS)

The purchase of Discover would likely make Capital One the biggest credit card lender in the US, bigger than even banking colossus JPMorgan Chase (JPM) in that measure. The company is probably best known for its ubiquitous TV ads that ask, "What’s in your wallet?"

Capital One would also gain a sizable credit card payment network of more than 300 million cardholders, allowing it to more heavily influence the fees that merchants pay when consumers swipe their cards at the register.

Read more: Credit card fees explained: 8 types you should know

Capital One, at the moment, utilizes other networks run by Visa or Mastercard for most of its cards.

Dan Dolev, an analyst with Mizuho Securities, said in a note late Monday that "we believe the merger could potentially pose some risks" to Visa and Mastercard, noting that Capital One is already the third-largest issuer of cards for those two companies.

Capital One CEO Richard Fairbank, who would run the combined firm, outlined his arguments in favor of the deal in a Monday night press release and a Tuesday morning call with analysts.

He called the deal "a singular opportunity to bring together two very successful companies with complementary capabilities and franchises" and pledged "to build a payments network that can compete with the largest payments networks and payments companies."

"We believe that we are well positioned for approval, but of course, we can't discuss our conversations with our regulators," added Fairbank on Tuesday.

Capital One predicts the deal will result in cost savings of $2.7 billion and close in late 2024 or early 2025 if it gets that regulatory approval.

But that’s still a big "if."

josephm 202249--ficapitalone--DATE-06/27/2008-- McLean, Virginia--PHOTOGRAPHER-MARVIN JOSEPH/TWP-- Photos for a profile of Capital One and its founder, Richard Fairbank.  (Photo by Marvin Joseph/The The Washington Post via Getty Images)
Capital One CEO Richard Fairbank. (Photo by Marvin Joseph/The The Washington Post via Getty Images) (The Washington Post via Getty Images)

The Biden administration has made it clear that it is seeking to limit the concentration of power in key industries.

Just last month, it scored a victory when a federal judge sided with the Justice Department and blocked the union of JetBlue and Spirit, the sixth-largest and seventh-largest airlines in the US, arguing that removing Spirit as an independent carrier would mean higher prices for consumers.

Another complication for Capital One is that this merger — the biggest announced so far this year anywhere in the world — will also shake up the banking industry at a time when that industry is also under increasing scrutiny following the failures of several sizable regional lenders in 2023.

By adding Discover, which provides most of its banking services online, Capital One would leapfrog several other rivals and become the sixth-largest bank by assets in the US.

It would have more than $600 billion in assets, putting it just behind Minneapolis lender US Bancorp (USB) but ahead of Pittsburgh lender PNC Financial Services Group (PNC) and Wall Street giant Goldman Sachs (GS). PNC boss William Demchak has been vocal about his plan to get bigger as a way of surviving long term.

UNITED STATES - SEPTEMBER 21: William Demchak, CEO of The PNC Financial Services Group, testifies during the House Financial Services Committee hearing titled Holding Megabanks Accountable: Oversight of Americas Largest Consumer Facing Banks, in Rayburn Building on Wednesday, September 21, 2022. (Tom Williams/CQ-Roll Call, Inc via Getty Images)
William Demchak, CEO of PNC Financial Services Group. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)

Even though industry giants JPMorgan Chase, Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) would all still be considerably bigger than Capital One, Washington is expected to give this deal a lot of extra attention.

The Justice Department has already said that it plans to widen the criteria it uses when evaluating bank mergers, while the Office of the Comptroller of the Currency has made it clear that it won’t be putting any bank mergers on the fast track.

Those statements came after regulators allowed JPMorgan to purchase the failing First Republic last May, a decision that generated some controversy in Washington as some argued it placed more power in fewer hands.

One such critic of that JPMorgan deal, Senator Elizabeth Warren, came out against the Capital One-Discover union on Tuesday, saying on the social media platform X that the tie-up "threatens our financial stability, reduces competition, and would increase fees and credit costs for American families." Warren asked regulators to block it.

"We expect a significant amount of regulatory scrutiny given we have not seen a bank merger of this size in several years, excluding forced mergers of failing banks," Kevin Barker, a managing director for Piper Sandler, said in a note late Monday.

The companies "likely will claim that the merger would allow them to compete with the larger Visa, Mastercard, and AmEx, but there will be pushback, at a minimum because the head of the antitrust division promised to closely scrutinize banking mergers," added Michael A. Carrier, a professor at Rutgers Law School.

Quinn, the professor at Boston College Law School, said that "whether this will pass regulatory scrutiny will depend on a number of things.”

"Will Capital One continue to issue cards through other networks it does not own? Will Capital One use Discover to leverage consumers? Lots of factual questions still unanswered. My initial thought is that this deal will pass muster, though I’ve been wrong plenty in the past."

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