Merger of Capital One and Discover Overcomes Significant Regulatory Hurdle
Down and Dirty: Capital One and Discover's Epic Merger
Get ready for a shakeup in the credit card game! Capital One, your friendly neighborhood bank, scored the green light from bigwigs, the Federal Reserve's Board of Governors and the Office of the Comptroller of the Currency, to weddingDiscover Financial Services, making headlines last Friday.
This all-stock deal, announced over a year ago, puts Capital One in the driver's seat against juggernauts like JPMorgan Chase, Bank of America, and Citigroup, who don't process transactions themselves. Cap One's new bride will also add a fresh stream of revenue from collecting merchant fees.
So, what does this mean for existing Discover lovers? That dancefloor might get a bit more crowded with Welcome Wagons, potentially leading to improved merchant acceptance rates. But, watch out for the possibility of higher credit card interest rates—For better, for worse, 'eh?
Capital One's reputation for catering to customers with credit scores in the 600s range, a.k.a the subprime bunch, means those riskier borrowers could be charged higher interest rates. But hey, that's just life in the subprime world.
In the spirit of sharing the love, the Fed slapped Discover with a $100 million penalty for overcharging certain interchange fees from 2007 through 2023. Yikes! Somebody's gotta pay for their mistakes.
Under the Trump administration, mergers were the flavor of the decade. With Trump's victory in November 2020, shares of Capital One and Discover (and other merging companies) saw a nice uptick. But the Biden administration, with its "bigger government, less merger" stance, wasn't as forgiving.
This merger, worth a cool $35 billion and set to close on May 18, 2025, promises to make waves in the financial landscape. Capital One will become the largest U.S. credit card issuer by volume and control one-third of the subprime credit card market. And what does that mean for consumers? Well, it could potentially reduce competition for borrowers with lower credit scores.
But hey, there's always a silver lining! Capital One's new venture could lead to lower transaction fees for merchants (and potentially consumers) thanks to Discover’s proprietary payments network, the third largest after Visa and Mastercard.
As always, big mergers come with risks. The combined entity will have to address the root causes of past enforcement actions against Discover Bank, implement a remediation plan, and comply with the Fed's consent order. So buckle up, folks. It's going to be an interesting ride!
- The merger between Capital One and Discover Financial Services, scheduled to close in May 2025, is expected to cause Capital One to become the largest U.S. credit card issuer by volume and control one-third of the subprime credit card market.
- This merger worth $35 billion could potentially reduce competition for borrowers with lower credit scores, but it might also lead to lower transaction fees for merchants (and potentially consumers) due to Discover’s proprietary payments network.
- The Fed has imposed a consent order on the merged entity, requiring them to address the root causes of past enforcement actions against Discover Bank, implement a remediation plan, and comply with the order's terms.
- Discover was penalized $100 million by the Fed for overcharging certain interchange fees from 2007 through 2023, a consequence of their past business practices.
- Banks such as banks, like JPMorgan Chase, Bank of America, and Citigroup, which do not process transactions themselves, will face increased competition when Capital One integrates Discover's merchant fee revenue stream into their business model.
