What Modernized Banking Regulations Mean for the Capital One-Discover Merger

Capital One began its acquisition of Discover Financial Services (“Discover”) for $35 billion, a merger that must clear Federal Deposit Insurance Corporation (“FDIC”) guidelines as well as garner Department of Justice (“DOJ”), Federal Reserve and Office of the Comptroller of the Currency (“OCC”) approval. (Evan Weinberger & Justin Wise, Bloomberg). On September 17, 2024, these entities announced certain new merger policies, signaling heightened scrutiny of the potential acquisition. Id.  These government agencies are reviewing the deal to ensure that the merger is not only compliant with regulations but can tangibly benefit consumers. Id. This article examines the history and legal challenges of the merger, the new merger policies announced, and the consequences of the merger’s success or failure.

The proposed merger comes at a time when fewer banks are merging, and those banks that do merge are trending toward much higher values than in recent years. (Gaby Villaluz & Zuhaib Gull, S&P Global). The Capital One-Discover merger follows this trend as the highest-valued acquisition of the year at $35 billion in stock. (Liana Baker & Matthew Monks, Bloomberg). In the event the merger is approved, Capital One-Discover would become the largest credit card lender in the US. Id. The enormity of the deal may signal to agencies that the merger would be anticompetitive, though the state of payment systems in the US complicates this. Id. By acquiring Discover, Capital One would no longer be bound to Visa or Mastercard networks and Capital One could issue Discover cards and set its own merchant fees. Id. Alternatively, Capital One could continue with Visa and Mastercard services which are much more established and widely accepted than Discover. Id. Though Capital One would have the autonomy to set its prices for Discover cards, banking agencies may also view the merger as giving Discover a wider-reaching platform to compete with Visa and Mastercard, giving consumers another option. Id.

While this point may help push back against the anticompetitive optics of the bank merger, Capital One’s prior acquisitions are likely to be factored in. Id. Capital One’s acquisition of Velocity Black, a high-end concierge service, evidences the company’s push to find higher-spending clientele. (Jenny Surane, Bloomberg). It is unclear how the banking agencies and DOJ will weigh these views on the merger, but given their newer holistic approaches, this push to reach higher-end consumers is certain to be considered under the newer FDIC guidelines. (FDIC).

The merger faces major hurdles in clearing approval. (Evan Weinberger & Justin Wise, Bloomberg). Following an executive order signed by President Biden in 2021, federal agencies governing bank mergers have updated their regulations to prevent anticompetitive business practices. (Simpson Thacher; FDIC; OCC). The OCC is vested with the power to approve or reject the merger application. (Evan Weinberger & Justin Wise, Bloomberg). The Federal Reserve needs to approve the transaction between the companies. Id. Even if the merger were to make it through OCC and Federal Reserve scrutiny, the DOJ could bring action to block the deal. Id. Finally, though the FDIC will not evaluate the applications, it does release guidelines for the other agencies to follow when evaluating merger applications. Id.

The FDIC finalized its Statement of Policy on Bank Merger Transactions in September 2024, replacing the previous guidelines which had not been updated since 2008. (FDIC). These new guidelines ensure that the FDIC will evaluate merger applications while considering the competitive effects on diverse groups of Americans of different income levels and geographic regions. Id. This includes analyses of the geographic markets where the bank has the most presence to ensure that consumers in these areas have options. Id. These updates to the FDIC guidelines are certain to play a crucial role in the OCC’s decision on whether to approve the Capital One-Discover merger. Id.

The OCC and DOJ have similarly updated their process for reviewing national bank merger applications. (Katanga Johnson, Bloomberg). The OCC has allotted more time to allow public comments and parse out applications that are more likely to be expedited from those that may need more scrutiny. (OCC). The current OCC director describes the changes as “[improving] outcomes to benefit communities, enhance competition, and support a diverse banking system.” Id. The DOJ is following suit with a more holistic approach that does not rely on surface-level metrics to assess competition but a wide array of factors using many different data types such as interest rates and customer service. (Simpson Thacher). Additionally, the DOJ is no longer seeking settlements or remedies from banks it challenges in court. Id. Branch divestiture is not enough to settle with the DOJ, and instead, the agency will simply give the banks its feedback on the merger while retaining the right to litigate even if the relevant agencies approve the merger. Id. These OCC and DOJ regulations severely complicate the merger process for Capital One and require it to consider more geographic and economic classes of consumers. (OCC; Simpson Thacher).

The thickets of new regulations and guidelines not only demonstrate regulators’ focus on a merger’s impact to consumers, but also casts doubt on the Capital One-Discover deal. (FDIC).  One hundred thirty-eight groups including The Consumer Federation of America and the Americans for Financial Reform Education Fund signed a letter sent to the OCC and the Federal Reserve which pointed out the anticompetitive nature of the deal. (Evan Weinberger, Bloomberg). Democratic senators such as Alexandria Ocasio-Cortez and Elizabeth Warren have publicly expressed opposition while Republican Senator Josh Hawley wrote to the DOJ recommending that it block the merger. (Danielle Kay, Bloomberg). Though the review process may seem onerous at the moment and makes the success of the merger questionable, Capital One’s outcome may also be at the political climate’s mercy. (Evan Weinberger & Justin Wise, Bloomberg). There is no guarantee that these policy updates established during the Biden Administration will remain during the current Trump administration. Id. Regardless, the success of the merger could serve to keep the Visa and Mastercard in check while elevating Capital One’s market share. Id.