July 23 (Reuters) - Banking giant Capital One and credit

card issuer Discover Financial have been hit with a

lawsuit claiming their proposed $35 billion merger would reduce

competition, drive up prices and should be stopped.

The proposed class action, filed on Monday in Alexandria,

Virginia federal court by two Capital One customers in Vermont

and New Jersey, said the deal would violate U.S. antitrust law.

The merger would create the biggest U.S. credit card issuer by

balance and sixth-largest U.S. bank by assets.

Capital One and Discover announced their merger plan in

February, swiftly drawing calls by some members of Congress for

U.S. regulators to block the deal and raising the prospect of

months-long antitrust scrutiny.

The two companies have defended their proposal, saying it

would drive competition in markets for credit cards and for

payment processing.

Capital One and Discover did not immediately respond to

requests for comment on Monday. Attorneys for the plaintiffs

declined to comment.

The U.S. Justice Department and Federal Trade Commission

have not taken any formal action to oppose the merger. They

declined on Tuesday to comment on the proposed class action,

which marked the first private lawsuit over the deal.

Discover and American Express both issue credit cards and

run their own payment processing systems. Visa and Mastercard

operate the country's largest card payment networks, but neither

issues cards.

The lawsuit said the existence of Discover and American

Express puts pressure on rivals to pay out rewards to customers

to stay competitive.

But after the merger, according to the lawsuit, "this

competitive force will greatly diminish."

Capital One said in a March regulatory filing that its deal

would not harm card competition because the combined entity

would still only account for about 13% of credit card purchasing

volume.

The lawsuit asked the court to either prevent the merger or

to require steps such as divesting assets to cure any

anticompetitive effects.

Last week, the Federal Reserve and Office of the Comptroller

of the Currency held a public meeting addressing the Capital One

acquisition plan.

The case is Tyler Baker and Lora Grodnick v. Capital One

Financial ( COF ) and Discover Financial Services ( DFS ), U.S. District Court

for the Eastern District of Virginia, No. 1:24-cv-01265.

For plaintiffs: Brian Dunne and Yavar Bathaee of Bathaee

Dunne

For defendants: No appearances yet

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