Capital One Deal for Discover Wins Approval From Regulators (1)

Capital One Financial Corp. received approval from US regulators to buy Discover Financial Services, a deal that creates the nation’s biggest credit-card issuer by loan volume.

The Federal Reserve and the Office of the Comptroller of the Currency, regulators responsible for approving the deal, announced their decisions in separate statements Friday. In giving its nod, the Fed said it evaluated “the financial and managerial resources of the companies, the convenience and needs of the communities to be served by the combined organization, and the competitive and financial stability impacts of the proposal.”

The transaction — valued at $35 billion when it wasannounced — was awaiting a last remaining hurdle: The question of whether the US Department of Justice would sue to block the acquisition. Staff had been divided about whether the DOJ should challenge the tie-up, with someconcerned the deal could harm competition, Bloomberg reported earlier this year. But antitrust division chief Gail Slaterdetermined there wasn’t enough evidence to challenge the deal.

Capital One and Discover credit cards

Photographer: Angus Mordant/Bloomberg

“We understand the critical importance of a strong and competitive banking system to our customers and our economy,” Capital One Chief Executive Officer Richard Fairbanksaid in a separate statement. “We look forward to bringing these two great companies together with a profound sense of possibility and responsibility to deliver for our customers, associates, shareholders and communities.”

The deal, which is expected to close on May 18, will increase competition in payment networks, offer more products to customers, increase resources for innovation and security and deliver community benefits, Michael Shepherd, interim CEO of Discover, said in the same statement.

Discover’s Lapse

The acquisition wasn’t without hurdles. The deal had to navigate the fallout from lapses at Discover, which disclosed in 2023 that it misclassified certain credit-card accounts starting in 2007, meaning merchants were charged more than they should have been to accept the cards for payment.

On Friday, alongside its approval, the Fed issued Discover with a consent order and a $100 million fine for overcharging certain interchange fees from 2007 to 2023. The Federal Deposit Insurance Corp. similarly issued three orders against Discover, including one requiring it pay at least $1.225 billion to affected merchants and another demanding it pay a $150 million penalty.

“For approximately 17 years, the bank misclassified millions of consumer credit cards as commercial, resulting in higher interchange fees for transactions processed on the Discover network,” the FDIC said in its statement. The misclassification led to merchants being overcharged by more than $1 billion in interchange fees when accepting card payments from misclassified cards, it said.

Discover has ended those practices and is repaying fees to impacted customers, the Fed said in its statement.

“Discover has been working with regulators to resolve the card misclassification issue and today’s announcements by the Federal Reserve and FDIC highlight the significant progress we’ve made toward resolving this issue,” Discover said in a statement.

Read More: Discover Plunges as Buybacks Halted Over Compliance Lapses

The OCC said its approval is conditional on Capital One providing a plan of corrective action and timelines to address the causes of outstanding enforcement actions against Discover and remediation plans. It has 120 days from the deal’s completion to submit the plan, it said.

Revenue Unlocked

The deal could unlock at least $1.2 billion in annual revenue for Capital One, which historically had to rely on Visa Inc. or Mastercard Inc. to issue its credit cards. With Discover in hand, the company can cut out those middlemen and have more control over the prices merchants are charged each time a consumer swipes one of the firm’s cards at checkout.

Discover owns three different payment networks: Discover Network, Diners Club International and its Pulse debit network.

Capital One, which reports earnings later this month, is known for its commercials featuring celebrities like Taylor Swift, Jennifer Garner and Samuel L. Jackson that ask, “What’s in your wallet?” The company has historically catered to subprime consumers who carry a balance on their cards each month, but in recent years has been trying to attract more premium customers.

Read More: Capital One Wants to Woo the Rich Without Being Snobby About It

It’s a win for banks’ merger-and-acquisition businesses, which have been hampered by Biden administration reluctance to approve big combinations. Some analysts and executives have said they’re optimistic more deals will win approval under President Donald Trump’s administration.

For now, and immediately after the deal closes, there will be no immediate changes to Capital One and Discover customer accounts, according to the statement from the companies.

(Updates with additional details and comments throughout.)

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Alan Goldstein

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