The Capital One merger with Discover just cleared a major hurdle

By Elisabeth Buchwald, CNN

New York (CNN) — There could very soon be a new biggest credit card company in the United States.

Capital One (COF) received approval from the Federal Reserve’s Board of Governors and the Office of the Comptroller of the Currency to acquire and merge with Discover Financial Services (DFS), the agencies announced Friday.

To get full approval, Capital One must provide the OCC with a plan “to address the underlying root causes of any outstanding enforcement actions against Discover Bank and plans for remediation of harm.”

The all-stock deal, first announced over a year ago, would give Capital One a major leg up against competing credit card-issuing banks such as JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C), which don’t process transactions themselves.

It would also give Capital One a new source of revenue from the merchant fees it collects.

For existing Discover customers, the move could increase merchant acceptance rates. But there’s also a risk that they could face higher credit card interest rates.

Compared to other major credit card issuers, Capital One has historically catered to customers with credit scores in the 600s range, which is considered subprime. Given these borrowers are considered riskier, they tend to get charged higher interest rates compared to higher-scoring individuals.

In signing off on the deal, the Fed announced it entered into a consent order with Discover and charged Discover a $100 million penalty “for overcharging certain interchange fees from 2007 through 2023.”

Under the Biden administration, the prospects of the deal receiving approval from the Department of Justice were much slimmer, given the administration’s overall antitrust stance.

But the Trump administration has largely been seen as being much more merger friendly. Immediately after President Donald Trump’s November victory last year, shares of Capital One and Discover rose, as well as shares of other companies that were attempting to merge — or which had previously called off deals altogether.

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