The Federal Reserve has approved Capital One’s merger with Discover Financial Services. The decision allows Capital One, a leader in consumer credit cards, to absorb Discover, which operates one of the most popular online checking accounts in the country.

Discover has consistently been ranked one of the best free checking accounts available.

At the same time, federal regulators finalized a consent order with Discover for a past interchange fee practice that overcharged merchants. That order includes a $100 million civil penalty and a set of mandatory reforms, which Capital One will now oversee.

The merger, one of the largest in the financial sector since the 2008 financial crisis, reflects shifting power dynamics in consumer banking and payments and raises questions about how the combined company will serve its expanded customer base.

Federal Green Light, With Strings Attached

The Federal Reserve’s approval came after a months-long review of the deal’s potential impact on competition, financial stability, and the needs of the communities served by both banks. The merger will bring Discover bank, based in Greenwood, Delaware, under Capital One’s umbrella, along with its popular consumer-facing products and national payment network.

But the merger was not approved without conditions. Discover Financial Services was cited for years of misclassifying millions of consumer credit cards as “commercial,” leading to inflated interchange fees charged to merchants. That practice, which ran from 2007 to 2023, impacted an estimated five million accounts and led to nearly $1 billion in excess fees. Senior leadership at Discover was aware of the misclassification but did not act until the issue came under regulatory scrutiny.

The Federal Reserve and FDIC ordered Discover to pay $100 million and to issue full restitution to affected merchants. Capital One, now assuming responsibility, must ensure the implementation of improved controls and oversight.

Related: Discover Ends Student Loan Lending; Here’s Alternatives

What Consumers Should Know

For customers who bank with Discover, the most noticeable changes may come on the checking account side. Discover’s no-fee checking account, known for its cash-back rewards and user-friendly mobile interface, has long been a favorite among online banking customers. 

Capital One offers online banking as well, but it has not developed the same loyalty around checking products. In fact, it’s banking products have frustrated consumers in recent years, and the CFPB even took action against Capital One’s practices. 

Credit card customers may see less immediate change. Capital One is already one of the largest credit card issuers in the U.S., with a well-known presence in travel and cash-back cards. Discover, while smaller, has built a base of customers who appreciate its straightforward rewards structure and its own payment network.

The combination of the two companies will likely lead to streamlining of credit card products and the eventual phasing out of duplicate offerings. It remains unclear how long Discover-branded cards will remain in circulation or whether Capital One plans to integrate the Discover network into its broader infrastructure.

What Comes Next

The Federal Reserve’s approval brings the deal one step closer to finalization, but the implementation period may take months, or years. Capital One must manage the operational complexities of merging two large banks with different systems, regulatory oversight requirements, and customer experiences.

For example, when Schwab bought TD Ameritrade, the deal was finalized in 2020, but the final account migrations weren’t completed until 2024.

The enforcement actions against Discover also require follow up. Capital One has committed to submitting regular progress reports to the Federal Reserve and to strengthening board-level oversight. Discover’s missteps are now Capital One’s responsibility to fix.

The outcome will significantly impact consumers in the coming years with less nationwide banking and credit choices.

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