Federal regulators approved Capital One’s (COF) bid to become America’s largest credit card lender, signing off on the company’s purchase of Discover (DFS) on Friday.

The merger will combine two of the industry’s best-known names, making it the biggest credit card company when customers’ outstanding balances are combined. Some consumer advocacy groups had pushed regulators to block the transaction, arguing it would severely limit consumers’ options.

However, the Federal Reserve and Office of the Comptroller of the Currency disagreed, determining that the credit card market would remain competitive after Capital One and Discover’s merger. Their approval of the deal may lead to more banks buying each other, since the industry had seen the deal as a test of regulators’ appetite for approving those transactions.

Capital One CEO Richard Fairbank called it an “exciting moment” for the two firms. 

He’s described Discover as having the “holy grail”: being able to issue credit cards for consumers that they use on Discover’s own payments network. Doing so cuts out the fees that middlemen Visa and Mastercard earn with every swipe.

Why Did Regulators Approve the Merger?

Capital One and Discover ranked No. 4 and 5 in credit card loans in 2023, behind Chase, Citibank and American Express, according to Capital One’s presentation announcing the deal. But combining the two would suddenly make them the top credit card lender, with $250 billion in credit card loans.

Some consumer groups had fought against the merger, particularly its impact on credit card borrowers with lower credit scores. The merger “would reduce options for financially vulnerable customers and reduce the already limited competition on pricing for non-prime credit cards,” the National Community Reinvestment Coalition and 137 other community groups wrote in a letter to regulators last year.

The Fed rejected those concerns, saying options for subprime borrowers would only become “moderately concentrated” without raising concerns of a monopoly. The Fed said in its decision that some 2,000 companies offer cards to customers with limited credit history.

Jesse Van Tol, the president and CEO of the NCRC, said in a statement that federal regulators “got this one wrong” and called on state attorneys general to “intervene against the harmful, anticompetitive Capital One-Discover merger.”

The Department of Justice can also sue to block deals after bank regulators approve them. However, the New York Times reported this month that the DOJ does not see significant concerns. The Fed’s decision on Friday made that clear, saying that after the agency’s review, the DOJ “concluded that the proposal does not warrant an adverse comment.”