WASHINGTON —
Competition — or the lack thereof — will be at the heart of the debate as bank regulators and antitrust officials weigh whether to approve the deal.
Does Capital One's purchase of Discover create an unstoppable credit card-issuing giant? Does it help consumers by giving Discover's payments network a fighting chance against massive rivals Visa and Mastercard? Or does it do both? And if so, what should be the verdict?
"The question is: Is this anti-competitive or is it pro-competitive?" said Todd Baker, a professor at Columbia Law School and managing principal at Broadmoor Consulting.
The Biden administration, which has pledged aggressive scrutiny of mergers in the banking and financial sectors, would ideally like not to be approving more big-bank mergers, Baker said. "But this might actually be one which is relatively pro-competitive," he added.
Monday's announcement of the proposed $35.3 billion merger immediately drew criticism from Democratic lawmakers.
Sen. Elizabeth Warren, D-Mass., said that the deal "threatens our financial stability, reduces competition, and would increase fees and credit costs for American families."
"Regulators must block it immediately," Warren said on X, formerly known as Twitter.
Consumer groups, including the
"Today's concentrated markets and behemoth banking organizations are the result of a thirty-year run of mergers and consolidation," said Patrick Woodall, senior fellow at the Americans for Financial Reform Education Fund. "It is time for the banking regulators to stop rubber-stamping these transactions and stand up for consumers, communities, and a more stable financial system by blocking this takeover."
The deal's approval is not a slam dunk, experts said, nor is its rejection. But they also said there are reasons to think that the Biden administration, notwithstanding its general skepticism of large mergers, might approve this particular deal.
Even if Capital One were to suddenly account for 19% of U.S. credit card loans — as some analysts calculated would be the case if the merger goes through — it would still face strong rivals such as JPMorgan Chase, Citigroup, Bank of America, Wells Fargo and American Express.
But the clearer argument for approval is that, thanks to Capital One's larger balance sheet and customer base, Discover's payments network would get the lift it needs to better compete with Visa and Mastercard, which are often described as a "duopoly."
"Will this introduce more competition into cards or reduce competition in banking?" asked Peter Conti-Brown, a professor at the University of Pennsylvania's Wharton School. "These are the questions on which the preliminary announcements are light, but that regulatory processes will be focused like lasers."
Within the Biden administration, bank regulators and the Department of Justice don't see the risks in a uniform way, Conti-Brown said. Some officials see any concentration as something to fight, while others see bank concentration as serving useful purposes, he said.
During a Tuesday morning conference call, Capital One CEO Richard Fairbank was optimistic about the deal's chances for regulatory approval. He said he expects the deal to close in late 2024 or early 2025.
The timeline could be crucial. Brian Gardner, chief Washington policy strategist for Stifel, noted that, should Republicans take the presidency after the 2024 election, many of the existing dynamics involving Democratic agency heads could be moot.
"At that point, things have shifted in favor of the industry," he said.
Fairbank hinted that concerns about the power of Visa and Mastercard could work in Capital One's favor, saying that the deal would "position us to compete more effectively against some of the largest banks and payment companies in the United States."
"We believe that we are well positioned for approval," he said.
The dominance of Visa and Mastercard in card processing has been the target of recent legislation that aims to reduce credit card swipe fees. That bipartisan bill would require larger banks to offer merchants the choice of two unaffiliated card networks that aren't both Visa and Mastercard.
The legislation has
Shahid Naeem, a senior policy analyst at the American Economic Liberties Project, a left-leaning group that criticizes corporate consolidation, argued that regulators should not take Capital One's pro-competition arguments at face value. He said it will be tough for Discover to "become a threat" to Visa and Mastercard.
Some Capital One customers may not want to ditch their current Visa and Mastercard cards and switch to the Discover network, Naeem noted.
"It's a tall task," Naeem said. "When these arguments are being made about, 'This is how this deal is going to improve competition,' it's important to just ask the next question … 'OK, why?' 'OK, how?' 'What's the time frame?'"
Jeremy Kress, a University of Michigan professor who was recently detailed at the Department of Justice to work on bank merger policy, said that he sees "red flags" in terms of the deal's competitive effects on the credit card market, given that Capital One and Discover are already among the top issuers.
"Antitrust law is not a balancing act," he said.
The recent rejection of the JetBlue-Spirit Airlines merger by a judge is a good example of why the Capital One-Discover deal should fail, Kress said.
JetBlue had argued that allowing the two airlines to merge would help the buyer to compete better with larger, legacy airlines. But the Department of Justice contended — and the judge agreed — that it's not enough for a deal to help competition in one customer segment. If another segment will be hurt, the deal should be rejected.
"You could see a similar line of reasoning applying here, even if for the sake of argument, you assume competitive efficiency in the card network business," Kress said. "If it would be anti-competitive for the card issuance market, then the deal is anti-competitive."
Last summer, the Department of Justice
Bank regulators have also been rethinking how they approach merger applications.
Late last month, acting Comptroller of the Currency Michael Hsu said in a speech that the agency he leads would
For the proposed Capital One-Discover merger, the bank regulators' review process will not follow its typical path.
Such reviews typically involve careful consideration of a deal's impact on bank branches in certain areas — often dealing with concerns about financial deserts — but Discover does not operate branches.
Baker said the deal would create a dominant player in the subprime credit card market, and potentially also in the near-prime market. That's a factor that might draw regulators' focus, he said.
"It really becomes a question, almost not of antitrust, but more around industrial policy," Baker said. "What do we want the banking and payment system to look like in the future?"
