Capital One Financial Corp., a U.S. consumer lender backed by Warren Buffett, is in advanced talks to buy credit-card issuer Discover Financial Services DFS-N, people familiar with the matter said.

A deal that would combine two of the largest U.S. credit-card issuers could be announced as early as Tuesday, according to the sources.

Discover has a market capitalization of US$27.6-billion, while Capital One is valued at US$52.2-billion, according to LSEG data.

While the exact size of the tie-up was not immediately clear, it has the potential to be the biggest acquisition in the U.S. banking sector since Bank of America took over Merrill Lynch for US$50-billion in 2009. It would combine the fourth and sixth largest players in the U.S. credit-card market by volume as of 2022, according to Nilson.

The banks did not immediately respond to requests for comment. Bloomberg News first reported on the deal talks.

The deal is likely to experience intense scrutiny as Democratic U.S. President Joe Biden’s administration continues to focus on boosting competition in all areas of the economy, including with a 2021 executive order aimed at bank deals.

Democratic progressives have long fought bank consolidation, arguing it increases systemic risk and hurts consumers by reducing lending, and have stepped up pressure on regulators to take a tougher stance on deals. That pressure intensified following deals aimed at rescuing failed lenders last year, including JPMorgan’s purchase of First Republic Bank.

“I predict that this deal, if it materializes, will provoke a significant push-back and receive heightened regulatory scrutiny,” Jeremy Kress, a University of Michigan professor who previously worked on bank merger oversight at the Federal Reserve, wrote in an e-mail to Reuters.

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

By assets, Discover was the 27th largest U.S. bank with nearly US$150-billion in assets in December, according to Federal Reserve data, while Capital One was the ninth-largest with US$476-billion in assets. The combined entity would be the sixth-largest U.S. bank, based on the Fed data ranking insured U.S. banks.

The deal would also come at time of increased focus on credit-card fees, which are subject to strict proposed new rules by the Consumer Financial Protection Bureau.

In a report last week, the agency flagged competition concerns in the U.S. credit-card market, noting that during the first half of 2023 small banks and credit unions tended to offer cheaper interest rates than the largest 25 credit-card companies across all credit score tiers.

In late 2023, Discover said it was exploring the sale of its student loan business and would stop accepting new student loan applications in February.

The company, led by TD Bank Group veteran Michael Rhodes, has faced some regulatory challenges. It disclosed in July a regulatory review over some incorrectly classified credit-card accounts from mid-2007.

In October, Discover said it agreed to improve its consumer compliance and related corporate governance as part of a consent order with the Federal Deposit Insurance Corp.

While supervisory issues are generally an obstacle for deals between financial firms, regulators are more amenable when the problems are with the target company and the acquirer is considered a good actor, according to legal experts.

Discover and Capital One reported 62-per-cent and 43-per-cent falls respectively in fourth-quarter profit, as banks increased provisions for losses from bad loans as rising interest rates raised the risk of consumer defaults on credit-card debt and mortgages.