Warren Buffett-backed U.S. consumer bank Capital One plans to buy U.S. credit card provider Discover Financial Services for $35.3 billion in all-stock deals. The deal will make Capital One a global payments giant, the two companies said on Monday.

Antitrust officials are likely to look closely at the deal. If approved, it would create the sixth-largest bank in the U.S. by assets and a credit card giant that would fight with JPMorgan Chase and Citigroup.

Discover does business in 200 countries and territories, but that’s still much less than Visa, Mastercard, and American Express.

They said, “This acquisition adds scale and investment, making the Discover network more competitive with the largest payment networks.”

For every Discover share owned, owners will get 1.0192 Capital One shares. This is a 26.6% increase over the price of a Discover share on Friday.

If the deal goes through, owners of Capital One will own 60% of the new company, and shareholders of Discover will own the rest.

The companies said they expect to save $2.7 billion before taxes through benefits like cutting costs and saving money on networks.

Discover will choose three people to be on the new board. It wasn’t clear right away how many members the board would have.

Based on its value, Capital One is worth $52.2 billion. Buffet’s Berkshire Hathaway is its seventh-largest shareholder, with a 3.28% stake. Based on sales, it was the fourth most significant player in the U.S. credit card market in 2022, while Discover was the sixth biggest.

A LOT MORE CHECKS

According to Capital One, investors should agree to the deal by the end of 2024 or the beginning of 2025.

Democratic President Joe Biden’s government has been working to increase competition in all parts of the economy, including bank deals, according to merger experts.

A business law professor at the University of Michigan named Jeremy Kress wrote in an email, “I predict that this deal…will provoke a significant pushback and receive heightened regulatory scrutiny.” Kress used to work at the Federal Reserve, overseeing bank mergers.

“It will be the first big test of bank merger regulation since the Biden administration’s executive order on promoting competition in 2021.”

Democratic leftists have been against bank consolidation for a long time, saying that it hurts consumers by lowering loans and raising societal risk. The pressure grew after deals last year, like JPMorgan’s purchase of First Republic Bank, meant to save failing banks.

The executive order from the Biden administration told bank officials and the Justice Department to review their rules on bank mergers. The DOJ stated that it would look at more aspects of bank deals for antitrust problems. Also, last month, the Office of the Comptroller of the Currency suggested ending its fast-track review process.

The deal would also happen when credit card fees are getting more attention from regulators. The Consumer Financial Protection Bureau wants to make strict new rules about them.

Its head, Rohit Chopra, is against mergers and has a say in how banks do business. This body has raised worries about competition in the U.S. credit card market, such as the biggest credit card companies charging higher rates.

John Kirkwood, a law professor at Seattle University School, said, “This would almost certainly lead to an investigation by the Justice Department.”

He also said that the investigation would probably look into how the companies stand in the credit card provider market, how that affects competition, and any possible hurdles for new companies.

SUPERVISORY Factor

Discover said in late 2023 that it was looking into selling its student loan business. In February of that year, it would no longer be taking new applications for student loans.

It has had some problems with regulators. Michael Rhodes, who used to work for TD Bank Group, is in charge of the company. It said in July that regulators were looking at it for some credit card accounts that were wrongly labeled in the middle of 2007.

Because of an agreement order with the Federal Deposit Insurance Corp. in October, Discover said it would improve how it deals with customers and runs its business.

Supervision issues usually get in the way of deals between financial firms. However, legal experts say that officials are more open to deals when the problems are with the target company, and the buyer is seen as a good person.

Discover and Capital One saw their profits drop by 62% and 43% in the fourth quarter, respectively. As interest rates rise, more people will likely not pay back their mortgages and credit card debt, so banks have increased their money to cover losses from bad loans.