Written by: Eric Bank
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
Key Takeaways
- Regulators approved Capital One's takeover of Discover for $35 billion, marking a major consolidation within the credit card sector.
- Regulators decided that the merger would not adversely impact consumers significantly.
- The merged organization is well-placed to support financial inclusion activities, servicing consumers who hold poor or limited credit histories.
Regulators approved the Capital One-Discover merger worth $35 billion, paving the way for one of the biggest consolidations ever in the U.S. credit card marketplace.
After initial reports that the Department of Justice thought the merger would harm subprime competition, the DOJ eventually decided it didn’t have a strong enough case to block the merger.
The go-ahead from the Federal Reserve Board and the Office of the Comptroller of the Currency (OCC) confirms that the merged entity can proceed with plans for integration, subject to final process completion. Despite the initial competition concerns, regulators pointed to the two companies’ different business models.
Capital One, which will become America’s largest credit issuer by loan volume, has a history of successful underwriting for a broad credit range, while Discover’s system enables one-of-a-kind in-house products. The overlap between the two companies’ customers was not sufficient to establish monopolistic results, according to the DOJ.
Capital One will also join American Express as the only issuers to own their payment networks with the acquisition.
The Federal Reserve stated that as a condition of approval, Capital One was required to meet its consent order with Discover, wherein it imposed a penalty of $100 million for charging excessive interchange fees between 2007 and 2023.
Excited by the ruling, Richard Fairbank, Founder, Chairman, and CEO of Capital One, expressed gratitude toward regulators.
“We understand the critical importance of a strong and competitive banking system to our customers and our economy, and we appreciate the thoughtful and diligent engagement of our regulators as they thoroughly reviewed the deal over the past 14 months,” Fairbank said.
Implications for the Subprime Industry
This move implies a wider embrace of credit card lending at scale as a route to innovation and resiliency. For the subprime market, it could mean better access and product variety.
Subprime lenders should likewise gain from clear industry signs and shared infrastructure innovation as both firms merge technologies and data expertise. By approving the merger, regulators effectively nodded at the role of entrenched players in perpetuating credit access at scale.
“We understand the critical importance of a strong and competitive banking system to our customers and our economy.” — Richard Fairbank, Founder, Chairman, and CEO of Capital One
“Our sense was that several executives were watching how the Capital One-Discover process transpired,” said Barclays analyst Jason Goldberg.
A Signal to the Market
This approval is a signal to other major lenders as well as nonprime-focused fintechs that strategic consolidation remains a possibility, even with escalated antitrust oversight.
The market can view it as a welcome trend toward regulatory pragmatism, prioritizing stability and innovation over fragmentation. It can even prompt other nonprime-centered financial companies to pursue new partnerships or acquisitions.
Final Thought
The approval of the merger highlights the significance of long-standing institutions in determining the future of subprime credit.
With their infrastructure and reach, Capital One and Discover are well-suited to drive responsible innovation within a sector that continues to play a crucial role for millions of U.S. consumers.
