The final outcome of the biggest bank deal since 2008, Capital One's
It could be blocked by U.S. banking regulators. The merger-skeptical Department of Justice could sue to block the tie-up, much like it did in the failed merger of JetBlue and Spirit airlines. Or the deal might get approved despite concerns from antitrust hawks.
Critics argue that the merger would create a massive credit card company, limit options for subprime borrowers and fail to put a meaningful dent in the market power of Visa and Mastercard.
Capital One argues that the deal does not pose anti-competitive concerns, saying that it would still face intense competition from JPMorgan Chase, American Express, Citigroup and other heavyweights.
The McLean, Virginia-based company also contends that the merger would improve competition in the payments market, the rails through which debit and credit card payments get processed. Discover's network has long lagged behind those owned by Visa and Mastercard, and Capital One says its wide customer base can make Discover a stronger competitor.
Determining which side's arguments prevail will take months, involving extensive analyses of overlap in the specific markets where Capital One and Discover compete. The battle could ultimately move to a courtroom, where economists would argue over the definition of those markets and to what extent they'd remain competitive.
"You can't do it in the abstract," said Lawrence White, a New York University professor who focuses on financial regulation and antitrust issues. "It all comes down to: What does the data tell us?"
The first step in answering those questions came last month, when Capital One filed its formal merger application with its two main regulators, the Federal Reserve and the Office of the Comptroller of the Currency.
Below is an overview of what's ahead and the key questions that will drive whether the merger gets approved.
The process
Regulators at the Fed and OCC will review Capital One's application in the coming months, and they're likely to hold public hearings on the deal.
Those hearings could prove contentious, given the opposition from some Democratic lawmakers and some key community groups. The National Community Reinvestment Coalition, which
As regulators weigh approving the merger, they'll consider whether it poses risks to financial stability, if it benefits the "convenience and needs" of communities and each bank's compliance with rules that guard against clients' laundering money.
But the real action will likely come when bank regulators analyze whether the deal makes markets more or less competitive. Those who oppose the deal say regulators have long taken a lax approach, using high-level metrics to study market concentration rather than narrower ones.
President Joe Biden's administration is, at the very least, sympathetic to those arguments. Months into his presidency, Biden issued an executive order calling for a government-wide review of antitrust policies, calling out "excessive market concentration" in several industries.
"It's an interesting test of the all-of-government approach of Biden's executive order," Harry First, an antitrust law professor at New York University, said of the deal.
Bank regulators have been somewhat slow to conduct their own overhauls, but momentum has picked up recently.
In January, acting Comptroller of the Currency Michael Hsu proposed some changes and
But perhaps the most notable voice in overhauling bank merger policies has been Jonathan Kanter, the assistant attorney general who's in charge of the DOJ's antitrust division.
Under bank merger policies, the DOJ submits a review of "competitive factors" to the banking agencies that approve or deny mergers. In a
The Biden administration's revision to DOJ guidelines for bank mergers has yet to be released, and the last update came in 1995. But last year the DOJ updated its guidelines for other companies, and advocates want the DOJ to
Rather than focusing mostly on overlaps in deposit bases and branch footprints, the DOJ will focus more closely on how mergers "may affect competition for different customer segments," Kanter said in his speech last year. That lens may prove critical as regulators weigh whether the combined company's subprime borrower base leaves those customers with fewer options.
The Fed and OCC can choose to approve the deal even if the DOJ flags major concerns. But if the banking regulators greenlight the merger, the Justice Department still has the ability to sue within 30 days in an effort to block the deal on anti-competitive grounds.
The DOJ hasn't fought a bank merger in decades. But the agency's willingness to do so seems heightened, if its recent spate of court cases in other sectors is any guide. Though the DOJ has a mixed track record of late, it scored a major victory in January when a federal judge nixed the JetBlue-Spirit deal.
"Across every industry, not just banking, this DOJ has been a lot more aggressive, a lot more interventionist," said Jennifer Rie, a senior litigation analyst at Bloomberg LP who focuses on antitrust issues.
Credit card issuance
The main product offered by both companies is the credit card.
Capital One had the fourth most credit card balances outstanding last year, while Discover was tied with Bank of America as the fifth largest card issuer, according to a Capital One investor presentation. If the firms merge, Capital One would become the largest credit card lender in the country, outpacing JPMorgan Chase and accounting for 19% of outstanding U.S. card loans.
That number alone does not trigger major red flags. Under new merger guidelines the DOJ issued for several sectors in 2023, the agency said a merger can raise monopoly concerns if the company's post-merger market share is more than 30%.
And the pure heft of Capital One's competitors suggests that credit card holders will continue to have options. The list of competitors includes Chase, American Express, Bank of America, Citi and U.S. Bancorp.
Plus, Capital One would keep its current spot as the third largest card company by purchase volume, behind Chase and Amex.
"The credit card industry is intensely competitive and dynamic," Capital One wrote in a filing to regulators, adding that it will "continue to face many significant competitors" even after the merger. That list includes thousands of banks and credit unions that issue credit cards, even if their individual scale is far smaller than big banks'.
The deal's critics, however, are pointing to the two companies' relatively large portfolios of subprime credit cards. They argue that bank regulators and the DOJ should define the credit card market more narrowly to focus on borrowers with subprime credit scores, who tend to carry balances rather than pay off their borrowings each month.
"They're going to become the biggest overall, but especially in the market for people who use their credit card to borrow," said Elena Botella, a former leader in Capital One's subprime card business who now works at the progressive group Omidyar Network.
Loans to subprime borrowers made up 32% of Capital One's U.S. credit card portfolio last year and 20% of Discover's, according to securities filings from each company.
Capital One's share is significantly larger than that of other large card issuers. Chase's subprime cards comprise 14% of its total portfolio, and the comparable figure at Citi is around 20%.
That type of high-level analysis doesn't take into account several nuances, such as whether borrowers have had subprime scores for a long time or not. Bank regulators and the DOJ would have access to far more detail, including data on other types of subprime lending beyond credit cards, as they weigh the deal's competitive impacts.
If the DOJ chooses to fight the merger, narrower definitions of the credit card or consumer lending markets may feature heavily.
"There's nothing that stops the DOJ from defining a market … that's narrower than just all potential credit card holders," said Rie, the Bloomberg legal analyst.
White, the NYU professor, said Capital One could defend itself in court if it thinks regulators' analyses don't adequately define the market. From there, it would be up to a judge to determine whether the government overstepped.
In its merger application, Capital One wrote that the Fed and OCC have recognized that "any market for credit card issuing is national in scope, intensely competitive and not concentrated," pointing to several bank regulatory evaluations focused on credit cards.
The company also pointed to the industry's "dynamism, innovation and competition," with various features that existing credit card issuers offer to consumers, as well as new entrants and competition from nonbank lenders.
If the DOJ does narrow its focus to subprime lending, it will have to consider that there are other "forms of credit" available, beyond just credit cards, said Fred Ashton, a competition economics analyst at the American Action Forum, a center-right think tank. Borrowing options for subprime consumers include personal loans, payday loans, auto title loans and newer forms of credit from buy now/pay later companies.
"A credit card doesn't just compete with other credit cards," Ashton said, adding that the DOJ would likely want to "narrow the market definition as finely as they can, but not so fine that it's unrealistic."
Payments networks
The major driver of the deal is what Capital One CEO Richard Fairbank has called "the holy grail" — being able to run at least some of Capital One's cards on Discover's networks.
Capital One has long had to go through two dominant middlemen — Visa and Mastercard — for the processing of payments that customers make on their cards. Switching would save it significant amounts of money.
Discover has built up a massive network of merchants that accept its cards, but amid lagging payment volumes, it has failed to take market share from Visa and Mastercard. It also trails Amex — which, like Discover, issues credit cards that run on its own network.
In its filing with regulators, Capital One said the Discover deal will make payments networks more competitive. The bank argues that its heft and large customer base can make Discover a more formidable competitor to Visa and Mastercard.
The deal will "promote competition by deconcentrating these highly concentrated markets, over which Visa and Mastercard tower," Capital One stated in its application. It is "the most viable chance to sustain and grow the Discover payments network," the bank added.
Critics of the deal question that assertion, saying that Capital One is only planning to shift a portion of its credit cards to Discover and does not have a concrete plan to meaningfully change Discover's trajectory.
"There's just no real path for Discover to begin to compete with Visa and Mastercard, because it certainly doesn't compete now," said Shahid Naeem, a senior policy analyst at the American Economic Liberties Project, a progressive antitrust group. "It's just a really tough argument to take at face value."
Discover processed some $550 billion in payments in the United States in 2023, far below Mastercard's $2.84 trillion and Visa's $6.8 trillion. Capital One says it plans to shift more than $175 billion in purchase volumes by 2027, an amount that Naeem says is far too small to make a difference.
The relatively slow approach toward shifting Capital One's credit card borrowers is partly because consumers wrongly believe that Discover cards aren't widely accepted in the United States. Capital One will work on changing that misperception through its "marketing muscle," Fairbank said at a conference in February.
But Discover is clearly lacking in its acceptance by international merchants. Shifting all of Capital One's credit card holders onto the Discover network right away could backfire, as travel-heavy customers realize their cards are no longer as widely accepted.
"The timing of how much we continue to build volume on that network is really going to depend on how fast we can address some of the brand perception and international acceptance issues," Fairbank said.
Instead of moving all of its cards right away, the shift is "going to be a crab walk," or lifting one leg at a time, Fairbank said.
Jeremy Kress, a professor at the University of Michigan, worries that Capital One could eventually charge merchants more money for using the Discover network, as not accepting the biggest U.S. card company would be harmful to retailers' businesses.
"Could that give Capital One the ability to jack up merchant fees to use its credit card network? I think that's a possibility," Kress said. "If that is a risk, it's one that the DOJ and the banking agencies are going to have to take into account."
Fees could also become a point of contention on the debit card side. Discover has long been exempt from the caps on debit card interchange fees that Congress passed in 2010 under the so-called Durbin amendment to the Dodd-Frank Act. Capital One would obtain Discover's exemption if the merger goes through.
Capital One has said that it plans to shift all of its debit-card business to Discover's network, which would save it hundreds of millions of dollars by cutting out the middleman.
But the removal of the Durbin amendment's price cap could also give Capital One an incentive to raise fees on merchants, argued Naeem, the American Economic Liberties Project analyst,
JPMorgan Chase CEO Jamie Dimon
"Of course, I have a problem with that," Dimon said. "You know, like why should they be allowed to price debit different than we price debit just because of a law that was passed?"
Jeff Norris, a top Capital One executive, said at a conference last month that the bank isn't envisioning any price changes on the Discover network.
Raising prices and potentially angering merchants would not necessarily be in Capital One's best interests, said Ashton, the American Action Forum analyst. In a February report, he wrote that the deal will "inject competition" into the payments market.
"While the deal would, in fact, create a bigger bank, the more important effect would be the likely creation of a viable alternative to Visa and Mastercard's prominence in the payments network market that could yield more favorable terms to merchants while expanding access to Discover's network," Ashton wrote.
Visa and Mastercard's pricing power has been the source of a long-running feud between the Justice Department and the two companies. Last month, Visa and Mastercard agreed to lower their interchange fees as part of
