Should the Fed Reverse Course on Capital One-Discover? Democrats Are Demanding It

The $35.3 billion merger of Capital One (COF) and Discover (DFS) has sparked a political firestorm, with Democratic lawmakers urging the Federal Reserve to revisit its approval. While regulators have greenlit the deal, critics argue it risks stifling competition in credit markets and cementing outdated banking policies. Here’s why investors should pay close attention—and why this isn’t just a regulatory squabble.

The Regulatory Clash: 1995 vs. 2023

At the heart of the controversy is the Fed’s reliance on 1995 merger guidelines, which focus on local deposit-market competition. Democratic senators like Elizabeth Warren and Maxine Waters argue these rules are obsolete. They want the Fed to adopt the DOJ’s 2023 Merger Guidelines, which prioritize broader antitrust factors like innovation, service quality, and niche markets (e.g., subprime lending).

The Fed’s analysis found no competitive harm, citing minimal branch overlap between the two banks. But the DOJ’s internal review flagged “marginal concerns,” particularly in subprime lending, where the merged entity could command over 30% market share. That’s a red flag for critics, who see the deal as a threat to smaller lenders and vulnerable borrowers.

Investors have already priced in regulatory risks. COF’s stock has underperformed the S&P 500 since the merger’s announcement, while DFS’s shares have fluctuated amid uncertainty.

The DOJ’s Dilemma: Visa vs. Capital One-Discover

The merger’s approval comes as the DOJ battles Visa (V) in court over alleged debit card market dominance. If regulators let Capital One-Discover proceed, it could undermine their argument that the debit card market is monopolistic. Conversely, blocking the merger might weaken Discover’s ability to compete with Visa—a paradox the DOJ must navigate.

Why Investors Should Worry

1. Regulatory Risk: The Fed’s approval isn’t final. While the merger is set to close in May 2025, Democratic lawmakers could push for congressional hearings or pressure regulators to revisit their stance. A delayed close or forced divestitures (à la First Republic Bank’s collapse) could hurt both companies’ valuations.
2. Market Concentration: A combined entity could squeeze smaller lenders out of subprime and credit card markets, leading to higher fees and fewer options for consumers—a trend that could spark future antitrust lawsuits.
3. Integration Challenges: Capital One’s five-year Community Benefits Plan (CBP), which pledges $265 billion in lending and investments, is a PR move but a logistical nightmare. Execution failures could trigger reputational damage and regulatory penalties.

Visa’s dominance in payments gives it a structural advantage, but the Capital One-Discover merger could reshape the landscape. If the merger survives, it might temper Visa’s growth—but not without a fight.

The Bottom Line

The Capital One-Discover deal is a litmus test for U.S. antitrust policy. While the Fed’s approval signals confidence in legacy guidelines, the DOJ’s evolving standards and political pushback create uncertainty. Investors in COF and DFS face dual risks: regulatory reversals and a market environment where consolidation could backfire.

Final Take:
- Bullish Case: The merger could boost Discover’s payment network, creating a formidable rival to Visa.
- Bearish Case: Subprime lending dominance and outdated regulations could invite prolonged scrutiny, eroding shareholder value.

The $265 billion CBP is a lifeline for the Fed’s argument, but with subprime borrowers already overexposed, the real winners may be the banks—not consumers. Stay cautious until the Fed updates its playbook.

Conclusion:
The Capital One-Discover merger isn’t just about banking—it’s a clash between old rules and new realities. With Democrats demanding a reevaluation and the DOJ’s stance in flux, investors should prepare for volatility. If the Fed refuses to modernize its guidelines, it risks not just this merger but its credibility in policing a $23 trillion banking sector. The clock is ticking—and so is the market.