Yuki Iwamura, Bloomberg/Getty Images
Key Takeaways
- Capital One’s acquisition of Discover was approved by federal regulators on Friday.
- Some consumer advocacy groups had pushed regulators to block the transaction, arguing it would severely limit consumers' options.
- After the merger, the combined company will be the biggest credit card company in terms of outstanding balances.
Capital One (COF) has been approved by the federal regulators to become America’s biggest credit card lender. They signed off on Discover (DFS)’s purchase on Friday.
The merger will combine two of the industry's best-known names, making it the biggest credit card company when customers’ outstanding balances are combined. Some consumer advocacy groups had pushed regulators to block the transaction, arguing it would severely limit consumers' options.
The Federal Reserve and Office of the Comptroller of the Currency, however, disagreed. They determined that the credit card industry would remain competitive even after the merger of Capital One and Discover. Their approval of the transaction may lead to the industry buying more banks, as the industry saw the deal as a way to test regulators’ appetite for such transactions.
Capital One CEO Richard Fairbank described it as an “exciting” moment for the two companies.
He has described Discover as possessing the “holy-grail” : being able issue credit cards to consumers that they can use on Discover’s payments network. It eliminates the fees charged by Visa and Mastercard for each swipe.
Why did regulators approve this merger?
Capital One and Discover are ranked No. Capital One announced that Discover and Capital One would be ranked No. Combining the two would make them the number one credit card lender with $250 billion credit card loans.
Some consumer groups fought the merger, especially its impact on credit cards borrowers with low credit scores. In a letter sent to regulators in 2013, the National Community Reinvestment Coalition, along with 137 other community organizations, wrote that the merger would reduce options for financially-vulnerable customers and reduce competition on pricing of non-prime cards.
The Fed rejected these concerns. It said that the options available to subprime borrowers will only become “moderately” concentrated, without raising any concerns about a possible monopoly. The Fed stated in its decision that around 2,000 companies offer credit cards to customers with a limited history of credit.
Jesse Van Tol is the president and CEO at the NCRC. He said in a recent statement that federal regulators have “got this wrong” and urged state attorneys generals to “intervene and stop the harmful, anticompetitive Capital One/Discover merger.”
The Department of Justice may also sue to block a deal after the bank regulators have approved it. The New York Times, however, reported this month the DOJ doesn’t see any significant concerns. The Fed’s decision of Friday made it clear that the DOJ, after reviewing the proposal, “concluded the proposal does warrant an adverse comment.”
