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If regulators approve, Capital One plans to buy Discover for more than $35 billion

LEILA FADEL, HOST:

Two of the country's largest credit card issuers may be merging. Capital One plans to buy Discover Financial Services for more than $35 billion if regulators approve. To talk about what the proposed deal might mean for consumers, we turn now to Raj Date. He was the first deputy director of the Consumer Financial Protection Bureau. He's now a managing partner at the investment firm Fenway Summer. Good morning.

RAJ DATE: Good morning. Thank you for having me.

FADEL: Thanks for being on the program. So I guess I want to start with I think what will be the big question on people's mind - customers of Capital One and Discover - what will it mean for them?

DATE: In general, and I hate to be anticlimactic, not very much.

FADEL: OK.

DATE: The fact of the matter is that these two firms, despite being giant credit card firms, are mostly complementary to each other. And as a consequence, I would not expect to see a ton of changes in terms of products or pricing or features. Indeed, like, the strategic rationale here is mostly driven by the differences in the company. So, for example, Capital One has a way bigger small business franchise than Discover. Discover is more global than Capital One. But the most important strategic difference between the two is that Discover has a proprietary network of its own, and Capital One does not.

FADEL: Is that what's driving this deal between the two companies? Because they're already pretty big.

DATE: I think that's the biggest piece of it. That is to say, there's some flexibility, and there's some services and product differentiation that you can provide if you are simultaneously the issuer of a credit card and the person who runs the network between, for example, the merchant and the issuing credit card bank. So on the whole, that's probably a positive for Capital One strategically. I don't want to pooh-pooh the financial metrics here either, though. I mean, the credit card business and banking in general are big fixed-cost businesses. And, you know, do you need two legal departments? Do you need two finance departments, two tax, two compliance, two risk? No. So you're going to end up saving a lot of money in terms of the overall spend of the combined entity. And that no doubt makes the financial picture quite a bit better.

FADEL: Now, this deal hinges on whether regulators will approve. So what will they consider when deciding whether to greenlight it?

DATE: Sure. You're absolutely right. So this does need regulatory approval. I mean, being a bank, after all, gives you certain privileges. You have privileged access to deposits and privileged access to the central bank's payment network, etc., and with those privileges come a level of oversight and supervision. And that's true here. So both the Federal Reserve and the - what's called the Office of the Comptroller of the Currency - that's the supervisor of national banks - would have to approve this deal. And they'll mostly be focused on whether or not the combined entity is going to be a safe and sound institution and whether or not we should expect markets to be more or less competitive by virtue of their combination.

FADEL: Now, will there be scrutiny, though? Two huge companies like this merging - I mean, is approval likely?

DATE: I think this really is a coin toss. The reality is that the political winds very much are not favoring the combination of large firms right now. But on the other hand, like, you know, even if you combine these firms together, there's still - you know, Wells Fargo is still three times bigger. Bank of America is still four times bigger. JPM is - J.P. Morgan is five times bigger. And even the network business - like, this would be a meaningful addition to Discover's network business in terms of the number of transactions that go through. But the reality is Mastercard is five times bigger than Discover is today. Visa's, like, 10 times bigger in terms of volume. So it's hard to make a case against the deal, but that's very much the way the political winds are blowing right now. So I think the companies have a lot in front of them.

FADEL: Raj Date is a managing partner at the investment firm Fenway Summer. Thank you so much for your time.

DATE: Thank you. Transcript provided by NPR, Copyright NPR.

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