The proposed $35 billion merger between Capital One Financial Corp. and Discover Financial Services cleared a major regulatory hurdle as the US Justice Department told financial regulators in a confidential memo that it didn’t have sufficient evidence to block the transaction.

The DOJ memo to the Federal Reserve and Office of the Comptroller of the Currency — the two banking regulators that must sign off on the deal — would allow them to approve the transaction, according to people familiar with the decision who asked not to be named discussing a non-public matter.

The news marks a change of direction after DOJ antitrust officials had in an interim version of the memo in January under the Biden administration outlined some concerns that the deal could harm competition, the people said.

Staff were divided about whether the DOJ should challenge the tie-up, one of the people said. After hearing from staff, the new antitrust division chief Gail Slater determined there wasn’t enough evidence to challenge the deal, one of the people said.

The January memo outlined concerns about the potential loss of head-to-head competition for first-time credit card holders. Antitrust enforcers were also concerned about the potential for Capital One to use Discover to evade regulatory caps on interchange fees for its debit card business, according to one of the people.

“Our deal with Discover Financial complies with the Bank Merger Act’s legal requirements and we remain well-positioned to gain approval,” Capital One said in a statement.

Discover and the Justice Department declined to comment.

Bank merger reviews at the DOJ are handled somewhat differently than other deals. While the antitrust officials review and advise on competitive factors in a deal, bank regulators take the lead and are the first to make a decision, accounting for issues such as how a merger impacts the safety and soundness of the banking system.

For decades the DOJ evaluated bank mergers almost entirely on the overlap in deposits. During the Biden Administration however, then DOJ antitrust head Jonathan Kanter said it would consider how a proposed deal impacts different customer segments and examine fees, interest rates, branch locations, product variety, network effects, interoperability, and customer service.

The New York Times earlier reported on the decision to clear the merger.

— By Leah Nylen (Bloomberg News)