Investigation into Capital One's Acquisition of Discover Financial Services

By Jonathan Stempel
NEW YORK (Reuters)

New York Attorney General Letitia James is investigating whether Capital One's proposed $35.3 billion takeover of Discover Financial Services (NYSE: DFS) violates state antitrust laws.

James filed court documents in Manhattan on Wednesday, seeking a subpoena for Capital One to provide necessary documents for her investigation, citing alleged lack of cooperation from the bank.

She indicated that the merger could significantly impact New York, where Capital One and Discover hold over $9.5 billion and $6.5 billion in credit card loans respectively. The potential effects would be particularly felt by New Yorkers with subprime credit scores, who are often vulnerable.

Headquartered in McLean, Virginia, Capital One is one of the largest U.S. banks, with $480 billion in assets as of June 30, and it is expected to report third-quarter results on Thursday. Discover, based in Riverwoods, Illinois, reported a $965 million profit last week for the third quarter.

In a statement, Capital One indicated it would respond to James through appropriate legal channels and expressed confidence in securing merger approval from federal banking regulators, citing strong pro-competitive and pro-consumer benefits of the transaction.

Discover has not yet commented on the situation.

The all-stock merger, announced in February, would create the largest U.S. credit card issuer with over $250 billion in outstanding loans, surpassing JPMorgan Chase (NYSE: JPM), and would grant access to more than 305 million cardholders.

James noted that the merger would extend Capital One’s position as the largest U.S. subprime card issuer, resulting in a combined market share exceeding 30%. This would also facilitate Capital One's expansion of payment operations, which include Visa and Mastercard branded cards.

The merger requires approval from shareholders, the Federal Reserve, and the Office of the Comptroller of the Currency. Both Capital One and Discover aim to close the deal by early 2025.

James revealed that her office requested Capital One and Discover to waive confidentiality in May to review documents submitted to the Justice Department’s antitrust division. While Discover agreed to a full waiver, Capital One did not comply, arguing it would grant New York unlawful “visitorial power” over national banks, prompting the subpoena request.

Additionally, customers have sued both Capital One and Discover, alleging that the merger would diminish competition and increase consumer costs.